Key Inflection Point

July 12, 2009
Mike Doran

Stocks finished higher after a tug-of-war session Tuesday. The NYSE composite climbed 0.8%, the S&P 500 0.5%, the Nasdaq 0.4%, and the Dow 0.3%.

Stocks finished higher after a tug-of-war session Tuesday.

The NYSE composite climbed 0.8%, the S&P 500 0.5%, the Nasdaq 0.4%, and the Dow 0.3%.

According to preliminary data, volume fell on the NYSE and was flat on the Nasdaq. Advancers beat decliners by more than 2-to-1 on the NYSE and 15-to-11 on the Nasdaq. Jewelry retailers, tire makers, and dairy food producers were some of the session's best performers. Building materials and banks were among the worst.

Despite a lack of leadership, stocks were able to log modest gains following upbeat earnings announcements from Goldman Sachs and Johnson & Johnson and a mixed batch of economic data... Goldman Sachs (GS 149.66, +0.22) unveiled earnings of $4.93 per share for the second quarter. Excluding a one-time preferred dividend, diluted earnings came in at $5.71 per share. The consensus was pegged at $3.54 per share. The better-than-expected results were helped by improvements in Goldman's fixed income, currency, and commodities segment, which generated record quarterly net revenues, and the trading and principal investments segment, which saw net revenue nearly double year-over-year... Though Goldman's results were impressive, many had expected the company to top the consensus earnings estimate. Despite the firm's best-in-class status, many also question the sustainability of earnings from its trading and investments division... The financial sector lagged for the entire session after showing leadership the day before. Financials closed 0.3% lower. Telecom (-0.7%) was the only other major sector to post a loss... Pharmaceutical and health care products giant Johnson & Johnson (JNJ 58.23, +0.51) reported better-than-expected earnings of its own by bringing in $1.15 per share. However, the Dow component didn't provide much leadership. Healthcare stocks advanced 0.4%... Some healthcare stocks were weighed down by news that House Democrats proposed a bill to expand health benefits in a plan that includes a public health plan option to compete against private insurers.

From a technical view, I think this week is critical. We're on the verge of demonstrating that the head and shoulders...might turn out to be a failed negative—which could lead to a super-rally. But it's too early to tell. What of the financials? Rarely is the leader of the next bull wave the leader of the previous bull wave. And the financials clearly were the leader of the previous wave. Watch technology after Intel's rather positive report, which may tell us a lot as far as the rally picking up steam. Everyone has seen this head and shoulders pattern. There could be a strong "run in the short seller rally," and the next few days will probably confirm the markets intermediate term direction.