Trader Talk

Pisani: The Overbought Relative Strength Index

S&P Futures little changed as the February Consumer Price Index (CPI) showed virtually no inflation pressure. The main number was unchanged, lower than the gain of 0.1 percent expected, and core CPI (ex food and energy) was in line with expectations of a gain of 0.1 percent.


1) As the S&P 500 hit another new high yesterday, traders were passing around lots of technical charts, in particular noting that the Relative Strength Index (RSI) is in unusally overbought territory.

The RSI was developed in the 1970s and is one of the most widely watched momentum indicators. Readings above 70 are considered to be overbought; readings lower than 30 are considered to be oversold.

The S&P 500 RSI closed at 76.79 yesterday; this is very lofty territory indeed, and traditionally has been a sign of a short-term pullback. However, as BTIG noted, 9 of the last 10 occurrences at this level have resulted in prices over 10 percent higher a year out.

The lack of volume has been widely noted; we will get a modest surge tonight on the options expiration.

2) FedEx down 1.8 percent pre-open, beat consensus of $0.72 by four cents (note they made $0.31 for the same period last year), they also had topline growth of 7 percent. Guidance of $1.17 to $1.37 for the current quarter is about inline with consensus of $1.26; the are expecting "continued modest recovery in the global economy."

So why is the stock down? First, there is the usual price runup going into earnings, but more importantly is this comment from FedEx CFO Alan B. Graf Jr, buried in the release:

"With our improved performance and outlook, we are reinstating various employee compensation programs, which will dampen earnings growth in the fourth quarter and fiscal year 2011."

Expect this to be a theme for the next couple quarters: as business improves, costs — like compensation — increases, putting some pressure on earnings. While this may dampen stock gains, it is good news from a human perspective: people may make more money, a move which will also show up in compensation reports compiled by the government.

Another example: last week, American Eagle noted a 10 percent rise in general expenses that outpaced its revenue growth. The retailer cited higher compensation as the reason for the jump.

2) Speaking of higher expenses: Nike saw its topline grow 7 percent in the last quarter, but it also reported a big 16 percent rise in general expenses due to investments in its stores and higher salaries.

However, the stock is jumping 3 percent after Q3 earnings surged above analyst estimates ($1.91 vs. $0.89 consensus). Revenues for the sports shoe and apparel maker came in above expectations too, largely thanks to strength in Emerging Markets (up 43 percent), China (up 10 percent), and Western Europe (up 4 percent).

Another good sign: future orders look strong too — with the company expecting 9 percent growth, the first time a rise has been seen in over a year.

3) Guess up 2 percent after earnings significantly topped estimates ($0.96 vs. $0.81 consensus) on higher margins and much better than expected 5.3 percent rise in comps.

Earnings guidance for the current quarter and the full-year are inline with estimates, but sales growth over both periods are expected to rise more than the Street's forecasts.

Additionally, the apparel retailer hiked its quarterly dividend by 28 percent to $0.16 per share.

4) TARP update: Hartford Financial, as expected, priced its common and depositary share offering to repay the TARP money. 52.25 million common shares at $27.75 per share (closed at $28.58 last night) , and 20 million depositary shares, representing an interest in 7.25 percent mandatory convertible preferred stock at $25 per share.

Comerica announced it has repaid the $2.25 billion in TARP money. This comes after the big regional bank issued $800 million in common stock earlier this month.

5) This may be a better market indicator than anything: Winnebago reported its first quarterly profit in two years — two cents! Don't laugh, they lost 36 cents in the same period last year. Sales of its largest and most expensive vehicles improved.

Encouraging for the firm: 1) production volumes picked up as it saw "a significant increase" in deliveries and 2) dealer inventories rose for the first time in 2 years. Chief Executive Bob Olson notes that conditions have been improving for the company since shipments bottomed a year ago.

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