It has been a wild start to the year. The market finished 2010 surging higher. Many have seen the market ripe for a pullback for the last several weeks. Corporate profits, by in large, have been well in excess of analyst expectations. The debate about the end of the advance in gold and silver prices has reached a fevered pitch, and just to keep things interesting we had a little turmoil in the Middle East thrown in at the end of the month to keep us on our toes.
The trading session started on a relatively quiet note Friday, with the S&P 500 able to move slightly above Thursday’s high to establish a new multi-year intraday high. A move higher after the release of the Michigan Sentiment report was met with swift heavy selling on news coming from Egypt. Stocks sold off across the board, except in the metals arena. Several “experts” came on and immediately gave a thorough assessment of a situation they clearly had known nothing about 24 hours earlier.
Wall Street retreated from its 29-month high on Friday as escalating anti-government protests in Egypt prompted investors to move away from equities and into safer assets. The civil unrest in Egypt caused the stock market's fear gauge to jump over 20 percent while boosting prices of safer assets like U.S. Treasury bonds and the greenback.
The CBOE Volatility Index VIX, which measures the level of investor anxiety, jumped 24% percent to 20.04, its largest daily percentage gain since June. In Egypt, President Hosni Mubarak sent troops and armored cars into cities in an attempt to quell street fighting and mass protests, and medical sources said at least five protesters had been killed and 870 wounded.
Oil prices rallied sharply to wipe out losses earlier in the week. Weekly lows were set at $85.11 per barrel, which also marked a two-month low. However, concern about potential spillover of social unrest in Egypt helped spur buying Friday. The energy component settled pit trade with a 4.3% gain at $89.34 per barrel. Natural gas attracted less support, but still ended up for the day. Contracts closed pit trade 0.2% higher at $4.33 per MMBtu.
Precious metals prices pushed higher, too. Specifically, gold gained 1.5% to $1336.40 per ounce while silver settled 3.9% higher at $27.99 per ounce. The strong gains followed a few sessions of relative weakness, in which both metals closed lower for three of the previous four sessions. Thursday gold prices put in their lowest level in almost four months, just below $1310 per ounce. Silver prices actually put in a one-month low near $26.70 per ounce early Friday morning. Some commodity newsletter writers that get significant air time on CNBC changed their tunes in light of the action in the metals markets Friday. They turned bearish earlier last week and then came on TV Friday saying that the lows Thursday marked a significant bottom. Time will tell.
Selling has taken its toll on the Russell 2000 Small-Cap Index Friday; it was off over 2% Friday. More than 90% of the members in the Russell 2000 were in the red Friday.
Despite such pronounced weakness this session, small caps still aren't at their weekly lows, which were set Tuesday in the wake of a pull back from the three-year high that the Russell 2000 set in the previous week. The pullback by the Russell 2000 and the subsequent failure to rebound to new highs alongside broader market measures like the S&P 500 could suggest that participants have started to rotate out of riskier equity issues.
Prior to the sharp pullback on Friday large cap technology stocks were particularly strong. Many of the names that fueled the epic advance in tech stocks over a decade ago are again reporting spectacular earnings. Through Thursday, tech leaders like IBM, EMC, Qualcomm and Oracle moved to multi year highs. Qualcomm reported earnings well in excess of analyst expectations and raised sales estimates for the year by over $1 billion dollars. Smartphone growth is expected to be strong again in 2011.
Monday saw activity in the energy sector. Massey Energy, a coal producer, was acquired for $8.5 billion dollars by Alpha Natural Resources. Exxon Mobil reported a 46% increase in earnings per share. For 2010, Exxon made after tax profits of $32.2 billion.
As I sit, the S&P 500 is responding favorably to the harsh selling of Friday. The index is right on its 25 day moving average. Friday marked the first sharp move below the 10 day moving average in close to two months. The S&P sits at 1281 right now. Key support is 1271. If the index fails to hold 1271 and the Dow and NASDAQ fall below 11,744 and 2676 respectively, we will see an acceleration in selling and our first pullback since November. At the end of November the S&P was flirting with support at 1173. The move from 1173 to last week’s 1300 range represented a 10.8% move higher in just two months.
With about 50% of companies already reporting, fourth-quarter profits for the biggest U.S. corporations have been exceptionally strong and 2010 is poised to deliver the third-best full-year gain since 1998.
S&P now forecasts fourth-quarter earnings will rise about 32% over a year ago when all 500 companies report, more than three times as fast as its forecast at the outset of this reporting season.
