Stocks treaded water yesterday, assimilating the gains of last week’s surge, which turned out to be the best week for stocks in over two years. But there were hints as to what is and isn’t important to the market now that QE2 is behind us.
The list of what’s not important starts with new downward ratings on foreign debt. Portugal was downgraded by Moody’s, and it didn’t cause the slightest stir in the markets, although stocks were slightly down when the announcement came. But the U.S. dollar did jump in reaction to the news and gained a slight amount from Friday’s close.
Stocks recovered later in the day on the news that factory goods climbed 0.8% in May. The report indicates that manufacturing in this country is starting to turn up.
One of the leading indicators that directly measures a buildup in manufacturing is the rate of capacity of box cars in use. Currently, the rate is low at about 40%, but it is improving, and the Dow Jones Transportation Index is improving, as well.
Note that the index broke through its intermediate resistance line last week. Although it hasn’t yet penetrated its high at 5,566 made in May, it came close on Thursday, closing at 5,549 with an intraday high of 5,559.
However, the transports’ sister index, the Dow Jones Industrial Average, isn’t even close to a breakout and is finding it difficult getting through its May high at 12,612.
Watch these two indices closely since a failure on the part of both would be very negative. And just as negative would be the breakout to new highs by the transports and a failure by the industrials. This is called a “bearish non-confirmation.” But if both head north, you had better be long stocks because the Dow indices will have issued a strong buy signal. The Relative Strength Index (RSI) of both indices appears to be turning away from its resistance line (red dashes) which, if it continues, would signal that a consolidation is forming.
Turning to commodities, both corn and wheat rebounded as rumors circulated that China and India were huge buyers. Corn for July delivery climbed 6.2%, and July wheat rose 5%. The move in the twin grains caused the PowerShares DB Commodity Index (NYSE: DBC) to gap up and confirm that a head-and-shoulders breakdown had been reversed. Look for the DBC to quickly challenge the 50-day moving average (blue line), as well as the intermediate resistance line at around $30.
Conclusion: Overall, I’m looking for a consolidation following the massive buying of last week. But the trends now favor a strong stock market, and any weakness should be used as a buying opportunity. If our timing chart introduced last week is accurate, look for a buying opportunity from July 10 to July 16.
For one stock to buy now, see the Trade of the Day.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.