Thursday, April 09, 2009

Wells Fargo News Pushes The Bears Back On Their Heels

The market is sharply higher in early trading, after finishing on a strong note last yesterday.

Before the open, Wells Fargo (WFC) announced its earnings would be double consensus estimates. They said the Wachovia business they acquired is doing well, and also said that net charg-offs for Q1 would be $3.3 billion, down nicely from last quarter's $6.1 billion incurred.

This news throws a wrench in the bears' argument that banks would announce terrible earnings, and lead a new leg down in the market. The bank index is surging +11.3% right now, and will likely continue as more bears cover their shorts, and if more companies in the space report similar solid earnings. I am glad I no longer have any shorts in this area.

The only sector that is not up today is the consumer staples sector, which is being weighed down by Wal-Mart (WMT), which reported same-store sales of +1.4% in March, but that was below estimates of 3.3% growth and below last months tally of +5.1%. So expectations were higher, especially after the strong earnings from the likes of Family Dollar (FDO) yesterday.

The Bank of England held rates at 0.5% and said it remains committed to quantitative easing. Barclays (BCS) confirmed it will sell its popular iShares fund business to CVC Capital Partners for $4.4 billion, a nice price tag. Japan also closed sharply higher after the Japanese govt. announced a larger than expected economic stimulus plan, equivalent to 3.1% of the country's GDP.

The dollar is higher today; oil is also trading higher, while gold is lower on the session; the 10-year yield is up to 2.93%; and the VIX is -3.1% lower again to 37.64, breaking to a new multi-month low (a good sign).

Trading comment: I'm glad I used yesterday's weakness to add to my long positions. It eases my performance anxiety just a bit. I added to my SSO broadly, and also got long the real estate sector (IYR) in my aggressive accounts for the first time in years. This is just a trade, but I think the positive news coming out of the financial sector should benefit the REITs as well. Also, this is another heavily shorted area, which could benefit from short-covering.

This market continues to stair-step higher, but it will be interesting to see if the rally takes a breather as we near the 6-week mark off of the lows. The market bottomed on 3/9, so six weeks takes us out into next week. The market often has 4-6 week rally and selloff phases, which is why I am keying off of this time frame. Just something to put on your radar.

long SSO, IYR; long WFC, WMT is select client accounts


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