Stocks opened lower on Wednesday due to unfavorable economic numbers here and abroad. But a mid-morning rally quickly erased the deficit, and the major indices closed with moderate gains.
Industrial production for April missed expectations in both the United States and Germany. And the Federal Reserve Bank of New York released a negative reading for its May Empire State index, which shows manufacturing activity in the state. But homebuilders’ confidence rose more than expected this month, and the baseline producer price index for April met expectations.
Biotechs were the subject of profit-taking. That and a 15-point drop in the price of Apple (NASDAQ:AAPL) put pressure on the Nasdaq, which turned in the lowest gain of the major indices.
At Wednesday’s close, the Dow Jones Industrial Average was up 60 points to 15,276, the S&P 500 rose 8 points to 1,659, and the Nasdaq was up 9 points at 3,472. The NYSE traded 741 million shares and the Nasdaq crossed 417 million. Advancers were ahead of decliners by about 1.3-to-1 on both exchanges.
Even as industrial production in Germany sagged, stocks in Frankfurt rose to new highs as buyers interpreted the economic weakness as more evidence that the European Central Bank will continue with an easy-money policy.
The U.S. dollar, as evidenced by the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP), broke from a bullish flag last week, and has been higher for five straight sessions, triggering a new MACD buy signal.
In February, SPDR Gold Shares (NYSE:GLD) broke down from a death cross (long-term bearish signal), and in April, executed a breakaway gap and a continuation gap. A recent rally was halted at the top of the continuation gap and Wednesday gapped down again. Gold is in a long-term bear market.
Conclusion: The world’s stock markets are in hyper-bullish trends due to a concerted effort by central banks to continue an easy-money policy designed to revive lagging economies. On Wednesday, in both the United States and Europe, lower manufacturing numbers resulted in higher stock prices. Technically, a market that rallies on bad news is a very bullish indicator.
The U.S. markets have outperformed others due to cumulative evidence that our economy is growing at a rate that is higher than other western nations. But investors should not conclude that profit-taking-induced corrections can’t occur. Thus, new positions should be established only in stocks that offer earnings growth that is superior to their industry peers. And a cash reserve of at least 10% should be available to take advantage of buying opportunities that result from normal bull market corrections.
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.