Equity markets pulled back from overnight highs, breaking a four session winning streak, after a prominent analyst posted a report stating that the financial sector still faces significant risks with regards to toxic assets and earnings and that government support programs may very well be insufficient to deal with the yet to emerge problems from regional and large scale banks. The ominous uncertainty proposed by this report fueled a strong sell off in the financial sector, with JP Morgan Chase and Wells Fargo both falling 4 to 6% respectively. A number of financial institutions were downgraded by Mike Mayo to “sell” or “underperform. Technology stocks had the wind taken out of their sails as disappointment regarding the breakdown of merger plans between IBM and Sun Microsystems sent a wave of negative sentiment throughout the tech sector.
The equity markets managed to rally significantly off the lows of the session toward the close, as the markets were able to digest to tech disappointment as a possible benefit due to the positive role of IBM during earnings season- an agreement to purchase Sun Micro could have been viewed as a significant dilution of earnings potential for IBM. The broader markets also managed to recover from session lows as another analyst reminded the markets that banks appeared to be on course for a series of small earnings gains that should prove sustainable. The VIX (US Volatility Index) jumped nearly 5% this session, suggesting that spring and with it Earnings Reports for 2009 1st quarter are in the air. Company reports begin on Tuesday with Alcoa first to report. Expectations are for a loss of 0.27 cents per share. Equity markets are likely to be extraordinarily choppy as earnings season kicks off, with a series of surprising gains and losses to be had for at least the next week and half until the general picture of earnings is digested and accepted.
Technically, June Dow Futures pulled back from the high end of the RSI measure, but held above a near term support of 7780. A significant level of support in the Dow has set up at 7580. If this level holds look for the Dow to move toward 8170. A break of 7580 could set up for a drop to 7310.
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