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Tough Crowd: Good Earnings Not Good Enough

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February 4, 2015

Earnings, the dollar, and oil are driving this market but, really, it’s about the black gold, baby. Stocks remain cozied up to the crude market, pulling back in early Wednesday trading as rallying crude futures pause. It was the notable rebound in oil prices to back above $50 a barrel that helped the energy sector (sorry, consumers) in Tuesday trading and handed the Dow Jones Industrial Average its biggest one-day gain in more than three weeks. Don’t dismiss the relief seen on Wall Street from a weaker (yes, weaker) dollar on Tuesday, the worst day for the buck in over a year, after so many execs have chirped about the currency drag on export-driven earnings. We also continue to see short-term rotation out of fixed income and back into stocks.

But today is a new day. U.S.-traded West Texas Intermediate crude futures are off some 3% early and U.K.-traded Brent is down some 2% as a late-Tuesday report reminded everyone why oil had been on its multi-month slide to multi-year lows in the first place—yes, another big inventory number in the weekly data and more inventory data is due out later today. Even with Tuesday’s rally, the broader S&P 500 (SPX) has been range-bound, with 1980-1990 as support and 2050 -2060 as resistance. Tuesday’s charge brushed up against that ceiling and leaves the bulls pushing for a technical breakout. But are the catalysts there? A tired market is holding earnings reports to very high standards.

FIGURE 1: Range Bound. The broader S&P 500 (SPX) lately moves within a band of 1980-1990 as support and 2050 -2060 as resistance. Data source: Standard & Poor’s. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Disney Cheered. Chipotle—Not So Much. Disney (DIS) may have made parts of Wall Street the happiest place on earth after its latest quarterly earnings. Most notable was the breadth of the results. Its television holding ESPN has long been a chief revenue driver, but this report included a big pitch-in from toys and movies, too. In fact, much of Disney’s broader portfolio came through. It was just one of several earnings reports hitting this week. Not all earning the same fanfare. Cue Chipotle (CMG). The fast-casual burrito chain’s shares fell as a “good” report failed to impress investors. Both top and bottom lines improved substantially from year-ago comparables just not to the degree that a fussy Wall Street demanded. The company noted higher dairy and beef costs (keep an eye on reports like this for potential inflationary signals). Looking ahead, CMG expects same-store sales for 2015 to rise in the low to mid-single digits. The company is planning to open 190 to 205 new restaurants in the year.

China Tries Again. Traders looking away from earnings and energy to macro issues will note overnight reports of more help from the Chinese government to try to get its economy firing again. The People’s Bank of China announced a cut in its reserve-ratio requirement on banks, the first move of this kind since May 2012. All we need to know is that officials are trying to goose the banking system and officially said the measure will “keep the economy stable.” Asian markets were closed at the time but stock markets in Australia and New Zealand, big exporters to China, rallied.

Paper Mates, But Not a Done Deal. Finally. After much speculation and a failed tie-up in the late 1990s, Staples (SPLS) agreed to buy Office Depot (ODP) for $6.3 billion in a stock swap. The deal values Office Depot at $11 a share, a premium of 44% over the closing price of Office Depot shares as of Feb. 2, when The Wall Street Journal reported the latest talks. The two office supply chains have roughly 4,000 stores and annual sales of more than $35 billion. It’s a combo that’s likely to get a close look from antitrust regulators, who in 1997 sued successfully to block the same proposed merger. But Street analysts say the retail landscape has changed since then with the rise of online competition from Amazon.com (AMZN) and big boxes that sell plenty of office supplies, including Wal-Mart Stores (WMT) and Target (TGT).

Good trading,
JJ
@TDAJJKinahan

JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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