Reply #116: slouching to the finish

[ozymandius]

Dow 11,141.33 +21.29 (+0.19%)
Nasdaq 2,333.27 -5.75 (-0.25%)
S&P 500 1,296.62 +1.12 (+0.09%)
10-Yr Bond 49.63 0.00 (0.00%)
NYSE Volume 1,898,315,000
Nasdaq Volume 1,880,760,000

4:20 pm : This morning, optimistic anticipation of the first quarter earnings season and (modest) improvements in the Treasury market had motivated buyers. Bond yields remained high, though, and their stunted recovery squelched the stock market's momentum. Investors shrugged off rising energy prices for a large part of the day, but crude's 2% afternoon spike helped to further dampen buying efforts.

With respect to the Treasury market, we continue to emphasize its effect on equity trade. Today's action reflects the attention that bond yields are receiving from the stock market. Friday's employment data roiled bonds, and that market's attempt to recover this morning appeared to relieve stock investors. Yields were still high, but the 10-year had edged away from the psychologically important 5.00% yield. A lack of a catalyst and lower than average holiday-week volume took the steam out of the advance, though, and as bond yields headed back towards unchanged territory, the major averages followed suit. Just before the closing bell, the 10-year's yield ticked slightly lower and prompted 0.2% advances in the rate-sensitive Financial and Utilities sectors.

The stock market appeared to follow the bond market today, but, all in all, stocks did still demonstrate some continued complacency to high yields. Over the course of the session, the yield on the 10-year remained at a four-year high and within very close proximity to 5.00%. The Dow and S&P both managed to finish the session with gains, albeit modest ones.

Aside from conditions within the Treasury market, rising energy prices continue to serve as another impediment for a more spirited, sustainable advance in the stock market. Investors did not appear very fazed by gains across the complex today, and the resulting 1.5% advance in the Energy sector was supportive. By the close of commodity trade, though, crude futures had gained 2% and were pushing $69 per barrel. That price action was fueled by increased anxiety over Iran, and speculation over potential U.S. military action, and did not help matters for the broader market today. UBS's downgrade on several semiconductor equipment stocks, due to a down cycle that the firm foresees in Q3, was a separate factor that weighed on equity trade.

With respect to the aforementioned Financial sector, there were some other factors behind its gain. First, banks were in focus following reports that J.P. Morgan Chase (JPM 41.93 +0.23) and Bank of New York (BK 35.04 -1.79) have agreed to a asset swap. Under the terms of the deal, the difference in premiums will result in J.P. Morgan's $150 million cash payment to the Bank of New York. For a Merger Monday, the M&A front was a quiet one. Still, brokers outperformed. An especially bright spot there was Goldman Sachs (GS 126.46 +1.44), which had been positively featured in a Barron's article.

Walt-Disney (DIS 27.79 +0.26) occupied much of the corporate spotlight today. The company, which is one of our suggested holdings for active investors, is planning on offering much of its television content for free on the internet. That stock helped limit the Discretionary sector's (-0.1%) decline, and it served as one of the Dow's best sources of support. Boeing (BA 80.79 +1.22), which is reportedly going to announce a $5 billion Chinese order tomorrow, also helped the blue chip average maintain its positive footing.

Fellow Dow component Alcoa (AA 32.83 +0.33) also garnered added attention. The company's earnings report, which is due out during today's after hours trading session, marks the commencement of the first quarter earnings season. Optimistic anticipation of what is expected to be another quarter of double-digit earnings growth helped deviate some degree of attention from the Treasury and energy markets today, and Alcoa's gain was supportive. In our view, rising bond yields and rising energy costs are apt to undermine what should be a solid quarter of earnings growth. DJ30 +21.29 NASDAQ -5.75 SP500 +1.12 NASDAQ Dec/Adv/Vol 1741/1311/1.88 bln NYSE Dec/Adv/Vol 1872/1393/1.35 bln