(eToro Blog) Investor sentiment continued to push U.S. equity markets higher, as fears over how European officials would handle the European banking re-capitalization plan subsided. Enough progress was made during the weekend that investors are already pricing in success. Although issues related to the EFSF and investor haircuts have been put off until tomorrow, fear over the outcome has somewhat abated. Strong earnings from Caterpillar also helped to drive stocks higher.
Solid Chinese manufacturing news also provided a boost to U.S. equities. HSBC's flash reading on their purchasing manager’s survey in China reassured the markets that a soft-landing view could occur on growth. The move to 51.1 from 49.9 in the overall PMI indicated a return to expansion. Additionally, the input prices sub-index, which reflects inflationary pressures, showed a drop to 54.3 in October from 59.5 a month ago. Decreasing indications of softening inflation will allow the Peoples Bank of China some flexibility when examining rates.
In addition to the solid earnings from CAT, Fedex announced strong future shipment expectations which points to a robust consumer. FedEx said it expects to move 17 million packages overall on what it anticipates will be its busiest day of the year, December 12, up 10% from its busiest day during last year's holidays season.
Caterpillar reported a profit of $1.14 billion in the third quarter, or $1.71 a share, from $792 million, or $1.22 a share, a year earlier. Revenue and sales jumped 41% to $15.72 billion. Analysts surveyed had expected earnings of $1.54 a share on revenue of $15.04 billion. The company expects its overall revenue next year to increase 10% to 20% from the $58 billion anticipated this year. In China, the company predicted that inflation has peaked and it expects no further monetary policy tightening this year, which should increase growth and sales.
Oil stocks moved higher as oil prices surged on the back of comments by Federal Reserve officials of a possible third bond purchase program. Oil prices shot up more than $4 dollars per barrel, increasing the value of large cap oil producers. Oil prices closed above resistance levels near 90.20 per barrel on a WTI basis. In the U.S. at least, oil prices are now in backwardation mode; this means that spot crude oil prices are higher than future prices; this phenomenon generally occurs when current demand for oil is greater than current supply.
The VIX volatility index dropped through the 30% level for the second time in the last seven trading sessions. Implied volatility is still largely above its 200-day moving average which is closer to the 22% level. A close below the 28% level will likely signal a move back toward the long term average.
Technically, the Nasdaq 100 has joined both the S&P 500 Index and the Dow in break out territory. The Nasdaq surged, breaking above resistance levels near 2370. The tech heavy index will likely test target resistance levels near the high of the year at 2450.
The Dow Industrials was propelled higher by CAT, as earnings beat analysts' expectations. The Dow broke out on Friday and continues to gain momentum, moving closer to target resistance near the 200 day moving average near 12,000. Support on the Dow 30 is seen near the 500-day moving average near 11,260.
The S&P 500 continued to break higher and is on target to test resistance levels near 1274. A break of this area would likely target the 1350 level which is the highs for 2011. Support on the large cap index is seen near the 10-day moving near 1215.
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