Stocks not only notched a second solid day of gains, but also showed improvement on the technical side Wednesday as the major indices closed near their highs for the day and breadth was strongly positive. That ought to cheer technicians who questioned Tuesday's jump, which was accompanied by weaker breadth and a late-day selloff. On Wednesday, advancers bested decliners by more than 2 to 1 in both Big Board and Nasdaq trading, amid solid volume of 1.6 billion and 2.1 billion, respectively, while up volume exceeded 68% of the total on both. From that perspective, Wednesday's action was better than Tuesday's even if gains by blue-chip averages weren't as big. The Dow Jones Industrial Average rose 0.4% to 10,498.59, the S&P 500 rose 0.5% to 1174.07 and the Nasdaq Composite rallied 1.3%. to 2046.09. The action seemed to justify the optimism expressed
Wednesday morning by RealMoney.com contributor Helene Meisler, who saw signs of strength Tuesday where others saw nothing new. "None of this is bell-ringing stuff, but the market isn't always about bell-ringing," she wrote. "The sand is shifting toward too many bears and better statistics. I still don't believe we've gotten there yet, but we continue to head in the direction of a better trading bottom." Among sectors that hit a bottom and bounced the last two days, airlines was among the strongest performers. The Amex Airline Index gained 1.6% on Wednesday and almost 5% on Tuesday after it had lost 27% in the first three weeks of 2005. The reversal came as oil sold off and Delta ( DAL) announced plans to increase flights on its low-fare carrier. On Tuesday, Airtran ( AAI) reported a 1-cent-a-share of profit instead of a large loss while J.P. Morgan put out a bullish note on Continental ( CAL). But the biggest reason for the move was perhaps better summed up by Prudential Equity Group analyst Bob McAdoo's contrarian take: "Things are bad -- so bad that they can't go on forever like this." He recommends overweighting Continental, American ( AMR), Northwest ( NWAC) and Southwest ( LUV) and underweighting Delta.
Charles Kirk, he of The Kirk Report, noted that the rally also coincided with a peak in new stock-buyback announcements. Six companies, including Texas Instruments ( TXN), announced buybacks on Tuesday. TI's announcement helped semiconductors secure a two-day bounce. The Philadelphia Stock Exchange's Semiconductor Index gained 1.8% on Tuesday and 2.6% on Wednesday. Texas Instruments, reporting after Tuesday's close, posted earnings better than it projected last month, affirmed future guidance and added to its stock-buyback program. Shares of TI rose 7% on Wednesday. Real estate investment trusts lost ground as an article in The Wall Street Journal noted heavy selling by insiders. Steel makers also were down, selling off after big gains on Tuesday.
There's not much in the data to explain the divergent views of present and future prospects yet. However, it may help explain some of the stock market's recent troubles. Mutual fund flows for stock funds, normally quite positive in January, actually have been net outflows in the first three weeks of the year. Perhaps realizing that the stock market looks ahead six to 12 months itself generally, consumers are discounting a slowdown now by pulling out of stocks. More troublesome over the next few months, revisions to analysts' estimates of earnings over the next 12 months appear to have peaked as they did in 2000, according to BCA Research. The firm's earnings-revisions ratio is the number of upgraded, 12-month profit forecasts minus the number of reduced forecasts, divided by the total number of revisions. The ratio dropped from positive territory, where it had been for the past two years, to negative at the end of 2004 for the first time since 2000. That means it may fall quite a bit more, undercutting the stock market, according to BCA. "History suggests that the analyst earnings revision cycle bottoms only when downgrades substantially outnumber upgrades," the firm wrote in its daily strategy note. "The implication is that further cuts to profit forecasts lie ahead, especially since analysts still project double-digit EPS growth, which is optimistic given the economic outlook."