Stocks are set to move modestly higher Wednesday morning following a rout on Tuesday. Yesterday, the Dow Jones Industrial Average ($INDU) plunged 150 points and the Nasdaq Composite Index ($COMPQ) dropped more than 40 points, or nearly 2.4%. Index futures were pointing to gains in both the Dow and the Nasdaq Wednesday morning, however, despite disappointing earnings results from one of the biggest technology companies.
Shares of Cisco Systems (CSCO) are set to trade lower after the networking company posted disappointing earnings results late Tuesday. The company, which is the third largest member of the Nasdaq 100 today, posted quarterly earnings of 15 cents a share. While the results matched official consensus estimates, the number was a penny shy of the so-called “whisper” number. In addition, some analysts expressed disappointment at Cisco’s higher-than-expected operating expenses along with its drop in gross profit margins. CSCO was down 5% in pre-market activity. In other stock news, Verizon (VZ) is likely to trade higher after saying that it is making progress in labor agreements with two unions that represent 80,000 employees. The company has been negotiating with the unions for nearly a month in an effort to avoid a strike that could disrupt its phone service in certain key states. Microsoft (MSFT) shares may also be active on news that the software maker is being asked by the European Commission to reveal more information about its Windows operating system to rivals and also change the way it sells music and video software.
The calendar of economic data remains fairly light during the next few days. There are no major reports scheduled for today’s trading session. Thursday, investors will get the latest readings on productivity and jobless claims. The jobless claims numbers may garner some attention after last Friday’s disappointing unemployment report. After that, there are no major economic events until next Tuesday when the Federal Reserve Open Market Committee [FOMC] holds it’s meeting on monetary policy.
Despite early strength in equities early Wednesday, there are reasons to treat any rally with caution. For one, any early gains may be technical in nature because stocks are short-term oversold. As evidence, the Trader’s Index ($TRIN), which gives oversold readings when it rises above 2.25, finished Tuesday’s trading session reading 2.63. In addition, the rout in the stock market yesterday was primarily the result of the action in the bond market, where prices fell and yields (rates) rose. Today, the bond market is likely to focus on 5-year note auction, which is the second-leg of the Treasury’s three-part quarterly refunding. If it does not go well, rates may continue to rise and put pressure on stocks.
Finally, many of the major averages are now failing to hold key support levels. For example, the Dow Jones Industrial Average dipped below its 50-day moving average [MA] yesterday for the first time since late March. Meanwhile, the Nasdaq Composite is now testing its 50-day MA, which sits near the 1,675 level. This sets up the next test for the market: i.e. will the Nasdaq hold its support level along its 50-day MA as the Dow rallies back up? Or will the Nasdaq fail to hold support and join the Dow in dropping back down below its 50-day moving average?
Frederic Ruffy Senior Writer & Index Strategist Optionetics.com ~ Your Options Education Site
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