Earnings, M&A, and the European Overhang

In spite of the European overhang, our markets continued rallying yesterday on lukewarm volume. Most earnings were positive and a few provided positive outlooks. Also, heavy Mergers and Acquisition (“M&A”) activity is driving the market. Netflix reported after the bell and significantly disappointed the market. It was down -$33/share or 28% in afterhours trading.

Tuesday, Texas Instruments, Amazon, UPS, Peabody Energy, Cummins, du Pont and US Steel all report earnings. We have 43 companies in the S&P reporting today so it will be busy. We have 51 companies in the S&P reporting on Wednesday and 62 on Thursday.

Short term, the markets have been showing strength. Up Volume was in the high 80s on the NYSE. On the NASDAQ, it was in the low 90s and qualified for a 90% Up Volume day. All of the technical indicators are showing overbought readings. This means that a short-term pullback is likely. It will depend upon earnings and Europe.

If selling accelerates on high volume, this would be bearish. However, if we get a weak pullback on light volume, this would be bullish and a good entry point. Midterm, we are still in a downtrend and selling has not gone away, even with this rally.

The European rescue is heating up quickly. The banks are fighting back against the European leaders on the size and scope of losses they will agree to incur. European leaders are still trying to figure out how to avoid triggering the credit default swaps (“CDS”). This was the same scenario that caused the banking crisis of 2008 and the collapse of Lehman.

Additionally, Spain is now reporting that it will struggle to meet its deficit reduction targets for the year as their economy slows. This further threatens contagion on the continent.

In overnight trading (Monday 9:58 p.m. CST), the Asian equity markets are mixed with Japan and China both in negative territory. The US dollar is up against other major currencies. Gold is flat and oil and silver are both down marginally, partially due to the stronger dollar.

Our US equity markets are down. The DOW futures are down -29 points, the S&P futures are down -4 points, and the NASDAQ futures are down -7 points.

Go Rangers!!!