Stocks rose for the second consecutive day on Monday, on light volume, despite some disappointing economic news.
Large-cap stocks comfortably returned to the middle of the sideways trading range that has held the market in stasis all year long as investors await clarity on the upcoming “hike/no hike” decision from the Federal Reserve on Sept. 17.
The Empire State manufacturing activity survey badly missed expectations and plunged deeply into negative territory indicating the worse contraction in output since the recession. New orders, backlogs and shipments all dropped outright. Seemingly at odds with last week’s strong industrial production report, it makes sense when one filters out abnormal strength in U.S. auto sales.
The drags are export activity (weakness throughout Asia and Europe), overstuffed inventories and energy (as low crude prices limit capital expenditures in the oil and gas industry). JPMorgan’s Daniel Silver believes activity will remain constrained going forward. Capital Economics labeled the drop a “massive collapse,” suggesting the factory sector “is in a lot more trouble than previously thought.”
As a result, despite the day’s gains — after bulls reversed an initial dip at the opening bell, pushing the Dow Jones Industrial Average up more than 200 points off its lows — trading had an air of caution about it.
In the end, the Dow Jones gained 0.4%, the S&P 500 gained 0.5%, the Nasdaq Composite gained 0.9% and the Russell 2000 gained 1%.
Treasury bonds were stronger, pushing yields down slightly. Crude oil dropped 1.4% to close at $41.90 a barrel, while gold rose 0.4% to close at $1,117 an ounce. The weakness in crude oil pushed the ProShares UltraShort Crude Oil (NYSEARCA:SCO) recommended to Edge subscribers to a gain of nearly 82% since it was first recommended on May 26.
At the sector level, healthcare led the way with a 1% gain thanks to a 2.1% move north in the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB). Energy stocks were the laggards, down 0.1%.
Tesla Motors Inc (NASDAQ:TSLA) gained 4.9% after a Morgan Stanley analyst upgraded the stock on expectations for the company to lead the shared mobility (think Uber) market. Zulily Inc (NASDAQ:ZU) gained 49.1% after agreeing to be acquired by Liberty Interactive Corp (NASDAQ:QVCA) in a $2.4 billion deal.
And finally, let’s talk about the “death cross” in the Dow last week, which was the first downward cross of the 50-day moving average below the 200-day moving average since 2011, a string of 906 trading days.
The cross is widely viewed as a sign of negative momentum by chart watchers. An analysis of market history by the Bespoke Group shows stocks tend to bounce over the next week or so before tipping into a period of weakness that lasts for one to three months. Over the next month, the Dow showed a median decline of 0.4% with positive returns half the time; compared to an average move of 0.6% over all one month periods of the last 100 years. Over three months, the median decline was 0.1% vs. an average move of 1.8% for all periods.
The just-ended streak of 906 days was the second longest run of market tranquility ever behind the period ending on Sept. 17, 1998.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to Investorplace readers.
