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Onward and Upward

July 16, 2007

By Sam Collins

After the trading best day in four years -- with the Dow Jones Industrial Average up 280 points on Thursday -- most observers looked for a strong opening on Friday and then some profit-taking going into the weekend. Instead, stocks opened slightly lower Friday and then proceeded to rally gradually for most of the day, with the emphasis squarely on the blue-chip stocks, just like the day before.

Dow component General Electric (GE) was the focus of much attention, since it is a proxy for so many industries. So, when GE reported an expected increase in Q2 earnings that met analysts' forecasts -- along with an announcement that it was getting out of the subprime business and was also doing a big buyback of its shares -- the market seemed to heave a sigh of relief and then continued on its merry way.

The University of Michigan's survey of consumer sentiment helped the markets along, too, as it showed an increase in July in consumers' outlook despite rising oil prices.

Several other Dow stocks helped the markets' advance, with Alcoa (AA) up 4.5% as a result of announcing that it will withdraw its offer for Alcan (AL) and let Rio Tinto (RTP) take over the Canadian producer, and Caterpillar (CAT) rose by more than 1% -- its sixth-consecutive advance and the second new all-time high in as many days.

At the close Friday, the Dow Industrials advanced by 46 points to 13,907, the S&P 500 added five at 1,553 and the Nasdaq rose by five, closing at 2,707. Volume on the NYSE was low -- just 1.3 billion shares -- and 1.7 billion traded on the Nasdaq, with breadth at about a positive 17-to-15 on both exchanges.

For the week it was a dramatic showing of the blue chips' strength, with the Dow gaining 2.2% for its best showing since April. The S&P 500 was up 1.4%, and the Nasdaq gained 1.5%. For the year, the Dow is up 11.6%, the S&P 500 is up 9.5% and the Nasdaq has risen 12.1%

In the futures pits, the week ended with crude oil (August contract) rising by $1.43 at $73.93 a barrel. Gold (August contract) fell by a dollar to close at $667.30 per troy ounce. The Amex Energy SPDR (XLE) gained 74 cents at $73.95 and the Philly Gold and Silver Index (XAU) rose by 28 cents at $151.08. The 10-year Treasury note closed on Friday at a yield of 5.107%, up in price by 3/32.

What the Markets Are Saying

Believe it or not, the skeptics still abound. Some claim that even though the major averages have vaulted to either new all-time highs or recovered highs (like the Nasdaq), the volume last week was somewhat low (which was especially true on Friday) and that highs made on low volume are a bad sign.

This year almost every new high was accompanied by lower average volume. But after several days, as the advance broadened, investors became more confident and the volume ultimately expanded. And last week, the following the July 4 holiday, is traditionally one of the slowest, with traders and investors vacationing and away from Wall Street.

So, with the doomsayers still doomsaying and the shorts in a panic, it looks like the markets will continue to plow new, higher ground. After the shorts have been sufficiently beaten, you may want to take a few profits. But for now, you should join the rest of the Street at the beach but stay long stocks.

Tomorrow I plan to talk about some trading targets for the major averages.

Today's Trading Landscape

This week will be very active for corporate earnings with the focus on some of the country's most visible financial institutions. Today look for earnings from the following companies: Eaton Corp. (ETN), W.W. Grainger (GWW), Mattel (MAT), Novellus (NVLS), Posco (PKX), Sensient Technologies (SXT), Stanley Furniture (STLY) and Sun Bancorp (SNBC).

Today's only economic report is due late in the day, and that's consumer credit. The big news this morning is that Vodafone (VOD) is "mulling over" an offer for Verizon Communications (VZ). And so, M&A is again back in the spotlight, and this time it could result in the biggest-ever leveraged buyout -- estimated at $160 billion.

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Sam Collins is ChangeWave's Chief Technical Analyst and a Registered Investment Adviser who manages portfolios for a fee. He can be reached at samailc@cox.net.