Sun Shines on Shares Yet Again
Nick Godt
07/28/05 - 05:10 PM EDT
The summer rally continued Thursday, the biggest day of the earnings season.
Thanks to strong earnings from the likes of
Starbucks (SBUX Quote) and
Dow Chemical (DOW Quote), a well-received change at the top of
DaimlerChrysler (DCX Quote), falling Treasury yields, and plain old momentum, the
S&P 500(SPX Quote) and
Nasdaq Composite(Nasdaq Quote) hit four-year highs yet again.
The S&P 500 rose 6.93 points, or 0.6%, to 1243.72, and the Nasdaq gained 12.22 points, or 0.6%, to 2198.44. The
Dow Jones Industrial Average(DJI Quote) gained 68.46 points, or 0.6%, to 10,705.55. Meanwhile, the Russell 2000 rose 1% to 681.33, the latest in a string of all-time highs for the index.
A case of indigestion may be in store for Friday, as any disappointment in a slew of key economic reports -- most notably the second-quarter GDP -- could provide an excuse for stocks to give back some gains.
Notably, the market was treading water Wednesday until a key economic report, the
Federal Reserve's beige book, continued to point to the so-called Goldilocks scenario of strong growth with no notable inflation. That helped bulls make the case for breaching new four-year highs on the S&P 500 on Wednesday.
It also helped that a tame inflation picture boosted bond prices and lowered their yields, which have been rising since late June. On Thursday, the benchmark 10-year Treasury rose 15/32 while its yield fell to 4.19%.
"A lot of people are now expecting to keep getting those Goldilocks-type report. But the risks of a disappointment keep growing with every new one," says Chris Johnson, market strategist at Schaeffer Research.
Economists on average expect the economy to have grown at a 3.5% pace in the second quarter, down slightly from 3.8% in the first quarter, according to Reuters. And the GDP's price deflator, one of the Fed's key gauges of inflation, is expected to be up 2.7%, compared with 2.9% in the first quarter.
Market players of late have been playing the old game of "buying on the rumor" and "selling on the news," which means that selling could occur even if the report meets both expectations of strong growth and low inflation. Of course, a miss, especially on inflation, would be more punishing. "The market has been more vicious to the downside than it's been rewarding to the upside," says Johnson.
The market also will have to grapple with other key reports, including the second-quarter employment cost index, the University of Michigan's consumer sentiment index for July, and the July Chicago purchasing managers index.
None of the market's current reaction, though, have to do with the fundamentals of the reports. As Johnson says, "the only thing the market is really focusing on right now is the market itself."
After the S&P 500 managed to break out of an oppressive trading range a couple of weeks ago, traders want to see how much further they can stretch the exercise and make new highs. But signs of sideways trading and consolidation have become more obvious recently, pointing to the nearby end of the three-month rally in stocks.
For Johnson, and for many market analysts, the most obvious sign is the performance of the semiconductor sector, which had been red-hot over the last couple of months, and recently led the Nasdaq Composite to its highs for the year.
But over the past five trading sessions, the Philadelphia Stock Exchange Semiconductor Index, or SOX, has been underperforming both the Nasdaq and S&P 500. After rallying Wednesday on the back of strong earnings from
Texas Instruments (TXN Quote) and
Taiwan Semiconductor (TSM Quote), the SOX has fallen back over the past two sessions. On Thursday, it finished only fractionally higher, a disappointing performance compared with the other major indices.
"The risk going forward is that consolidation results in a couple of down days and that investors start taking profits," he says.
Rick Bensignor, chief technical strategist at Morgan Stanley, believes that while "it's late in the game," the market still may have "a little more to go on the upside." Because of the S&P 500's recent uptrend, he may raise his yearly target on the S&P 500 to a range of 1250-1290, from 1240-1280 previously.
"It's not much and it's not going to be a piece of cake to get there. For investors, the risk is that three months or six months from now we won't necessarily be much higher from [current] levels on the S&P," Bensignor says. "For my part, the closer we get to 1250, the less I want to put some money in there."
To view Aaron Task's video take on today's market, click here.
