What a difference a day makes. The markets have sharply reversed to the upside from Wednesday's triple-digit decline following fresh economic data and strong third-quarter earnings reports. Overnight, the better-than-expected global PMI reports from China and Europe (including higher German figures) set futures in motion for our markets today, but that was just a kick-start. Solid U.S. initial jobless claims for the week prior and a stronger Chicago Fed Activity Index added to the early gains as well.
The real driver today has been earnings; it's the busiest day of the third-quarter release period and, boy, they haven't disappointed. Caterpillar (CAT), 3M (MMM), General Motors (GM), Union Pacific (UNP) and many more positively surprised to the upside. More importantly, they didn't guide lower, as many had thought. This is one of the main reasons the market has been on this wild ride of triple-digit action (there have been 16 since Sept. 23 alone). After listening to a bunch of these companies' calls, as well as several others from the past few days, the U.S. dollar's strength and Europe's softness have been more than offset by stronger North American demand and higher margins.
The industrials have taken it on the chin the most, falling 11% peak to trough, so the combination of better results and depressed shares are leading the market higher. This group is new leadership in the marketplace vs. the defensive sectors, and that's a positive sign for the overall economy and market. With many of the industrials still well below their highs, we are inclined to add to our existing positions and we are watching a few old favorites.
Cummins (CMI) which is still off nearly 20 points from its recent highs and should equally show solid results in the power generation side (which is one of the upside surprises from Caterpillar), as well as continued strong truck demand and residential/non-residential construction. 3M just posted margin expansion in all four divisions for the first time in several years and was able to post 4% organic growth. Finally, Honeywell (HON) delivered a stellar quarter with 5% organic growth, double-digit margin expansion and higher guidance.
We'll see how these prices shake out and likely only add one of them, but they all likely move higher into the end of the year now. We continue to like what we see in United Technologies (UTX), Dow Chemical (DOW), which was upgraded today, Lear (LEA) and Eaton (ETN), which is the true wildcard given its poor operating performance in the past year (which we view as priced in). But we are tempted in these names given the improved risk/reward, better visibility and strong execution.
This Alert was initially sent to Action Alerts PLUS subscribers at 2:23 p.m. EDT on Oct. 23, 2014.