A package of positive economic data encouraged investors to put some of their sidelined cash to work Monday, and that drove the S&P 500 (SPX), NYSE Composite (NYA), and the Nasdaq (NASD) to new highs for the year.
Personal spending for April declined just 0.1%, which was better than expected, and personal income showed a 0.5% increase. The Institute for Supply Management (ISM) Manufacturing Index for May was 42.8, which was in line with estimates.
The markets also most likely gained from purchases by money managers who traditionally make investments on the first trading day of a new month. Positive data from China and Europe helped bring in new money, too.
And even though General Motors (GM), the world’s biggest auto maker, filed for bankruptcy, that cloud which has hung over the markets for months has now been removed. As a result, GM will be removed from the Dow Jones Industrial Average (DJI) along with Citigroup (C). They will be replaced by Cisco Systems (CSCO) and The Travelers Companies (TRV).
Yesterday’s gain brought the Dow to within just a percentage point of a gain for the year. Both the S&P 500 and the Nasdaq are now ahead for the year.
Nine of the 10 major sectors in the S&P 500 gained yesterday, but buying was centered in industrials and technology. And the CRB Commodity Index reported its best day in two months, up 3.1%.
At the close, the Dow Jones Industrial Average (DJI) gained 221 points to 8,721, the S&P 500 (SPX) was up 24 points, closing at 943, and the Nasdaq (NASD) rose 54 points to 1,829.
Volume on the New York Stock Exchange fell from Friday’s frenzy to 1.5 billion shares and advancers led decliners by almost 5-to-1. On the Nasdaq, advancers were ahead by more than 3-to-1 with volume of 852 million shares.
The July crude oil rose $2.27 to $68.58 a barrel as a result of the positive economic data reported early in the day and good economic news from China. The Amex Energy SPDR (XLE) gained $1.90, closing at $53.58.
The July gold contract fell 30 cents to $980 an ounce, and the PHLX Gold/Silver Index (XAU) lost $2.41, closing at $157.75.
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What the Markets Are Saying
Although there was broader buying Monday, the buying was primarily centered on those stocks that would benefit most from a continuing rise in the price of commodities and the currencies that are tied to them.
Meanwhile the dollar continued its slide and with it U.S. treasury bonds. Since yields rise when prices fall, the 10-year note’s yield rose to 3.715% — the highest since Nov. 14. This could put some pressure on the equity markets and slow down the buying as conservative investors go for the higher-yielding treasuries and a guaranteed return versus the risk of owning stocks.
For a month, both emerging markets and commodities have outpaced almost everything else, and those areas are still the focus of many traders. Despite the S&P 500’s (SPX) thrust through its 200-day moving average and following the Nasdaq (NASD) to new recovery highs, the S&P must break through the “Obama Top” at 944, made on Jan. 6. And it probably will.
But after such an extended advance and with bond yields now at more attractive levels, the chances of another major move higher this month are remote.
Our internal indicators are neutral, as are the sentiment indicators. That tells us that stocks should continue to move higher; therefore, we’ll remain on the bullish side but with a bias toward emerging markets and energy stocks.
Yesterday the precious metals, both gold and silver, suffered a slight correction and this may continue. But crude oil gained and since there are a number of energy stocks that can directly benefit from a currency move, relatively high yields, and higher energy prices, we’re headed north again to Canada where black gold can provide higher total returns with lower market risk.
This morning, the government is insisting that banks must first prove that they can raise money from private investors before returning TARP funds — this means more dilution as a result of more stock sales. JPMorgan (JPM) and American Express (AXP) both announced plans to sell stock and the premarket prices of both have fallen.
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Today’s Trading Landscape
Earnings to be reported include: Alloy, Applied Signal Technology, Blue Coat Systems, Bob Evans Farms, Daktronics, Financial Federal Corp, H.H. Gregg Appliances, Hovnanian Enterprises, Layne Christensen, Mitcham Industries, Modine Manufacturing Co, United Natural Foods, VeriFone Holdings.
Today’s economic reports include the International Council on Shopping Centers (ICSC) Chain Store Sales Index for May 30, Redbook Retail Sales Index for May 30, April Pending Home Sales (the consensus expects 0.5%), May 29 API Oil Industry Report, ABC/Washington Post Consumer Confidence for May 30, and May auto sales.
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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.
