MarketView for January 27

Summary

Strong corporate earnings led Wall Street to a 29-month closing high for a second consecutive day on Thursday. The Dow Jones industrial average and the S&P 500 indexes had a difficult time advancing beyond major technical levels -- the 12,000 mark for the Dow and 1,300 for the S&P 500.

Microsoft reported a small decrease in quarterly earnings, but the stock still managed a 2 percent gain after the earnings report, which came earlier than expected. The company helped the sector to outperform the broad market for a second day. Microsoft's share price ended regular trading up 0.3 percent at $28.87.

Other technology stocks, such as Netflix and Qualcomm, supported the Nasdaq, but disappointing results from AT&T and Procter & Gamble kept the Dow's advance in check. Netflix was up 15.2 percent to $210.87, while Teradyne rose 11.8 percent to $16.35. Both posted results Wednesday after the close. At the same time, AT&T and P&G fell as their earnings fell from the year-ago period. AT&T closed down 2.1 percent to $28.13, while P&G was down 2.9 percent to close at $64.18. Qualcomm closed up 5.8 percent at $54.89. The increase came a day after the company raised its outlook for second-quarter and full-year revenue.

The S&P 500 faces technical resistance near 1,300, an area where closing and session highs clustered during August 2008. Technical analysts also view 12,000 on the Dow as a possible sell trigger as the blue-chip average approaches nine straight weeks of gains. The S&P has risen 2 percent since the start of the earnings season and is up 23.7 percent since September 1. As a result, a number of technical measures are indicating that the market may be in thin air with the need to fall a bit and regroup.

The CBOE Volatility index .VIX, Wall Street's so-called fear gauge, fell 2.8 percent to 16.17. Thomson Reuters data showed 71 percent of the S&P 500 companies that have reported earnings so far have exceeded estimates. Trading volume on the three major exchanges was 7.6 billion shares, as compared to last year's estimated daily average of 8.47 billion shares.

Rise in Jobless Claims Blamed on Weather

The Labor Department reported that New first time claims for unemployment insurance rose sharply last week as snowstorms in some parts of the country kept workers at home, but the underlying trend pointed to an only gradual labor market improvement. Initial claims rose by 51,000 claims to a seasonally adjusted 454,000, the highest since late October. That was the largest weekly increase since September 2005.

A Labor Department official said four states had reported an increase in claims that was due to snow. In addition, he said, seasonal volatility also affected the data. Still, the four-week moving average of unemployment claims -- a better measure of underlying trends, rose 15,750 to 428,750 last week, implying a gradual labor market recovery.

Labor market recovery remains painfully slow, despite signs elsewhere of a pick-up in economic activity, keeping the unemployment rate at an elevated 9.4 percent. The number of people still receiving benefits under regular state programs after an initial week of aid increased 94,000 to 3.99 million in the week ended Jan 15. The numbers were above market expectations for a dip to 3.85 million and included the week for the household survey from which the unemployment rate is derived.

The prior week's number for the so-called continuing claims was revised up to 3.90 million from 3.86 million. The number of people on emergency unemployment benefits rose 63,886 to 3.78 million in the week ended January 8, the latest week for which data is available. A total of 9.4 million people were claiming unemployment benefits during that period under all programs.

Economy Continues to Improve

Is the Nation’s economic growth still showing increasing strength? It would appear that way when you consider that housing and factory data on Thursday indicated that the economy gained strength in December but at a pace unlikely to cause the Federal Reserve’s heart to flutter and subsequently rethink its stimulus program. Fed officials on Wednesday acknowledged the improving economic outlook but said the pace of the recovery remained "insufficient to bring about a significant improvement in labor market conditions."

According to a report by the National Association of Realtors on Thursday, its Pending Home Sales Index, based on contracts signed in December, rose 2 percent to 93.7. The increase, was another data point pointing to a continuing rise in the sales of previously owned homes this month.

Meanwhile, a separate report from the Commerce Department indicated that orders for a range of domestically manufactured goods gained 0.5 percent last month. However, a drop of almost 100 percent in orders for civilian aircraft pulled overall index down 2.5 percent. The drop in overall durable goods orders was a surprise because the consensus of thinking was that orders would rise 1.5 percent, given that Boeing reported an increase in aircraft bookings from November. Core capital goods shipments, which go into the calculation of gross domestic product, rose 1.7 percent after increasing 1.4 percent in November.

The economic outlook was clouded somewhat by an increase last week in applications for state unemployment benefits. The government blamed the increase on snow storms in the previous week in some areas that kept workers at home and delayed claims processing. Claims in the prior week posted their biggest drop in nearly a year. Another snow storm this week could affect claims data in the coming weeks.

Initial claims jumped 51,000 to a seasonally adjusted 454,000, the highest since late October, the Labor Department said. That was the largest weekly rise since September 2005. A Labor Department official said four states had reported big increases in claims due to snow. In addition, he said, seasonal volatility also affected the data.

The four-week moving average of unemployment claims -- a better measure of underlying trends rose last week, but the increase was far less than the spike in new claims, implying a gradual labor market recovery.

For Some Amazon Disappoints

Amazon.com forecast lower margins reflecting the costs of its growth strategy, ending the price of its shares down 8.5 percent. Amazon also posted fourth-quarter revenues that just missed estimates. To the chagrin of many short-term shareholders, Amazon has always focused on long-term growth and has never been shy about investing -- crimping profit margin to drive future revenue growth. Last year's spending on 13 new distribution centers and new acquisitions, from Diapers.com to Quidsi.com, is still impacting the company’s earnings.

Based on Amazon's projections, the company's operating profit margin for the first quarter could range between 2.8 percent and 3.8 percent -- well below the 5.5 percent operating margin since in the first quarter of 2010.

Chief Financial Officer Tom Szkutak noted the "very significant growth" over the past year that was reflected in the company's profit outlook. Szkutak declined to comment on just how much investment in infrastructure, talent and other costs the company planned to make in 2011.

"The big question for 2011 is what the growth would look like," he said. "Stay tuned," he said, for "how much capacity we'll have to add to support the strong growth for the year. We'll have to see what that looks like."

Amazon expects to post a first-quarter operating profit between $260 million and $385 million, including $140 million for stock-based compensation and asset amortization. It expects revenue between $9.1 billion and $9.9 billion for the first quarter. The company's fourth-quarter revenue of $12.95 billion fell just short of the average estimate of $13.01 billion. The company drove growth through discounting in the holiday quarter, which pressured margins.

Net income in the fourth quarter was $416 million, or 91 cents per share -- up from $384 million, or 85 cents per share, a year earlier. Amazon shares traded at $168.75, down 8.5 percent, following the earnings report, after rising more than 5 percent to end at $184.45.