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DJIA shows life

|Includes: BA, CAT, CVX, SPDR Dow Jones Industrial Average ETF (DIA), IBM, JNJ, KO, MCD, MMM, PG, TRV, UTX, XOM
This morning, we opened to the Dow Jones Industrial Average down almost 150 points and scraping the 10,000 level. It looked pretty terrible and the bull in me started to feel trampled.
 
It’s up 19 at 10,173 (3pm), quite a comeback.
 
Why the sharp sell-off? Apparently analysts were surprised IBM had a shortfall in revenues, caused by the weak euro. The Q2 earnings call was generally positive, and currency headwinds were the main reason earnings weren’t even better than the $2.61 recorded versus $2.58 estimated.
 
As this writer has pointed out recently, more DJIA companies earn more revenues from outside the US than ever before.
 
Fully 1/3 of IBM’s revenues come from Europe. How could they be so surprised?

Or perhaps traders were simply following the path of least (emotionally exhausted) resistence, and selling.
 
On the conference call, CFO Mark Loughridge was quick to point out that more of IBM’s revenues now come from “growth markets” than developed nations. Aka the BRIC countries (Brazil, Russia, India, and China).
 
I was asked by one reader of The BCMI Report recently, why I expected Q2 earnings to be OK, but guidance in Q3 to be better, rather than the reverse expectation that is prevalent.
 
My main reasoning was the swing back up by the euro currency, and a recovery in Chinese and European growth. A quick look at the euro chart will show multinational companies will only start benefiting from the resurgence in euro currency effects, during Q3.
 
Rather than sell, during the morning swoon, I looked back at some DJIA analysis I performed on May 28th, in anticipation of my interview on BNN where I called for a rally in this important market bellweather.
 
I focused on the top twelve DJIA movers (the ones with the highest stock price and therefore more sway on the price average).
 
Here is a list of them, with the Opening Price today, the Change since May 28, and whether the stock is currently above, below or at the stock’s 200 day moving average:
 
1) IBM $123.37 ($1.36), Below
2) MMM $81.22 +$1.92, At
3) CVX $71.30 ($2.57), Below
4) MCD $69.70 +2.83, Above
5) UTX $65.88 ($1.50), Below
6) CAT $63.80 +$3.50, Above
7) BA $62.62 ($1.56), Above
8) PG $61.55 +$0.46, At
9) JNJ $58.17 +$0.30, Below
10) XOM $57.95 ($2.51), Below
11) KO $52.62 +$0.60, Below
12) TRV $49.71 +$0.24, Below
 
Total change over the past two months? 12 cents. The DJIA had hardly budged over almost two months, in spite of all the negativism.
 
Of course, it also was a rollercoaster ride, both up and down. It’s hard to be a “Bull Rider” when the Bull is kicking so hard.
 
Seven of these most important twelve DJIA movers are below their 200 Day Moving Averages, three are Above and two are Even. That’s not so good. We need to get a few more above their MA.
 
Two more are below their 200 day MA compared to May 28 (IBM and UTX moved from Even to Below).

Note that a cyclical stock trading below it's MA may actually be more indicative of a future bounceback (eg XOM, CVX), whereas I would be more concerned with a  growth stock (eg J&J) trading on a downward trend.
 
Three stocks are definitely in strong up trends: 3M, Caterpillar and Boeing.
 
Boeing and United Technologies are very tied to airline performance, and UAL’s good earnings today and positive comments from IATA indicate the airline industry may be turning profitable.
 
Tomorrow’s United Technologies earnings call could yield signs as to whether this DJIA laggard might start rallying with improved airline traffic, load and profitability.

Boeing logged good sales at the Farnborough Air Show this week, giving impetus to this other aerospace related Dow component. Boeing reports Q2 on July 28.
 
This Thursday, no less than six DJIA components report earnings (AXP, CAT, MSFT, 3M, T & TRV).  I expect better earnings from CAT and 3M than the financials.
 
We should know by the end of the week, whether this is another false rally, or whether the DJIA can break out of its almost three month long downtrend.
 
Before you sell this most recent rally, note fully ten of these twelve DJIA movers go ex their dividends in August. There is also the chance some may announce increased dividend rates with their earnings releases.
 


Disclosure: Long S&P 500 and S&P/TSX ETF's, REIT's and commodity stocks