Fundamentals, US Markets

US Stocks Pare Gains at Close on Spending Concerns; Wells Fargo Downgrade

U.S. Session Key Developments

•    Crude Rallies to New High on Inventory Report
•    Market Falls in Final Hour on Wells Fargo Downgrade
•    Beige Book Shows Improvements

US Markets fell sharply in the final hours of trading as spending concerns in the Fed’s Beige Book, coupled with a cut to “sell” for Wells Fargo by Rochdale analyst Dick Bove, led to weakness across the board. The Federal Reserve’s report on economic developments in the twelve districts showed manufacturing and residential real-estate leading gains, while lending remained weak and consumer spending has yet to show substantial recovery. Retailers in several districts do not expect sales to rise sharply in the final quarter of the year, and a weak lending environment may indeed be a sign of a shift in consumer spending habits. While earnings reports from firms including Yahoo, Morgan Stanley and others have proven favorable to traders today, the overall picture remains clear: With stocks more than 50% off their lows, and the NASDAQ composite up 36% year-to-date, equities have run a tight upward trend with small retracements along the way. However, contractions may be limited in the future, just as in the past, as confidence remains high and sidelined cash remains ready to fill in the dips. The months ahead may prove to be optimistic as seasonal sales are likely to boost retailers while recovery in M&A activity amid fewer job losses could propel stocks higher.

DJIA 30                      9,949.36                   -92.12               -0.92%
The Dow ended the day below 10,000 for the first time in three sessions as nearly all sectors fell with financials down nearly two percent. The drop came amid a downgrade to Wells Fargo as it becomes clear that recovery will not lead to winners across the entire sector. Rochdale analyst Bove downgraded the bank, while citing lower taxes and mortgage servicing fees as involved in nearly 30% of the breakout profit reported by the lender. Also dropping from recent highs were JPMorgan and Bank of America, down approximately three percent each. Despite breaching psychological resistance in the recent week, the Dow may have more room to drop following a rally of 25% since early July.

S&P 500                     1,081.40                   -9.66                 -0.89%
The broad S&P500 saw a fall of nearly as much as the Dow as weakness in Financials and Consumer Services led stocks lower. Major movers on the index included banks, with Wells Fargo tumbling 5.12% following a downgrade to “sell” at Rochdale Securities. Other losers outside the financial sector included Walmart, down 2.07%, and a 2.9% drop in Pfizer. Ultimately, a bit of divergence was noted as firms which reported strong earnings managed to close higher. Morgan Stanley and U.S. Bancorp ended higher with gains of 4.8% and 2.65%, respectively, while Apple also climbed 3.1%. Profit taking or panic selling as it may be, optimism remains high and may not lead to a significant pullback.

NASDAQ                    2,150.73                    -12.74             -0.59%
The technology-heavy NASDAQ saw a fall of just over half-of-one percent as two stocks fell for each that gained, while the tech sector closed little changed. Major movers included Apple, up 3.1% on strong earnings, along with a nearly 1% gain in Microsoft as Windows 7 nears release. Pent up demand during the recession may lead to a resurgence in sales for tech companies. Many have rallied immensely off their lows in such anticipation and it remains no sure bet that further upside is high. With a move of more than 70% off its early March bottom, and the highest performance of the three major indices year-to-date, the NASDAQ remains a questionable bet going forward. At the same time, the index may not fall as severely as its counterparts could as many of the giants making up the composite are well positioned in terms of low debt and global sales.

Notable US Event Risk / Economic Releases

Written by Roman Kadinsky, CFDTrading Research
Please send any comments about this report to Rkadinsky@fxcm.com