Stocks registered minor gains on Tuesday as the financial sector lagged.
The slowdown was primarily due to the government’s requirement that banks must prove their ability to raise capital before they are permitted to return TARP funds. It was felt that this requirement could flood the market with new bank stocks, diluting shareholder’s equity and draining capital from other sectors.
JPMorgan Chase (JPM) fell 1.2% after it announced a $5-billion common stock offering, and American Express (AXP) was hit for 4.92% after it announced an offering of $500 million. Morgan Stanley (MS) announced that it is planning to raise $2.2 billion, nevertheless its stock rose by 0.67%.
Technology stocks were generally weak yesterday led by the semiconductor stocks, off 3.3%. Selling resulted from an announcement by Applied Materials (AMAT) that there will be more failures in the semiconductor equipment sector amid declining customers.
The National Association of Realtors said that pending sales of existing homes rose 6.7%. This was the biggest jump in monthly sales in eight years, but the market seemed to ignore the report and focused instead on declining semiconductor sales and the TARP funds issue.
At the close, the Dow Jones Industrials (DJI) were up 19 points to 8,741, the S&P 500 (SPX) gained two points, closing at 945, and the Nasdaq (NASD) gained eight points, rising to 1,837.
The New York Stock Exchange traded 1.4 billion shares with advancing stocks ahead of decliners by a margin of 3-to-2. On the Nasdaq, 775 million shares traded with the ratio of advancers to decliners at about 7-to-5.
The July crude oil contract fell 3 cents to end the day at $68.55 a barrel, and the Amex Energy SPDR (XLE) lost 14 cents, closing at $53.44.
The June gold contract rose to $983.20 an ounce, up $4.60, and the PHLX Gold/Silver Index (XAU) gained $3.43 to close at $161.18.
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What the Markets Are Saying
Two of the major indices, the Dow (DJI) and the S&P 500 (SPX), closed above their May 8 highs, and the S&P 500 exceeded its Jan. 6 high of 943.85, as well as its 200-day moving average. But the market seemed to be struggling as upside volume fell, and the good news of another increase in housing starts was ignored.
Technically, the market has broken out, but it is alarming to have such a tepid response to good news and that alone raises a warning flag.
To those who have been in the markets for years, there is nothing more disturbing than a market that fails to react to good news, especially when it occurs at a critical technical area. I’ve often said that the strongest markets are those that move higher despite bad news, and those that ignore or move lower on good news are to be avoided.
At the same time, the internal indicators have been strong, and Moving Average Convergence/Divergence (MACD) has issued another buy signal. It could be that the S&P 500 will continue to move higher but at a much slower pace until it reaches the 1,000 area where the true test of its direction will be made known.
Meanwhile, there are lots of stocks, industries, and sectors that are acting better than the major indices.
Most commodities-based stocks, such as Alcoa (AA), look like they could move higher. Even though many of the emerging markets have had big gains, they appear to be in major bull markets and could move even higher. With that in mind, I’d avoid investing in the general market and be selective and place your money only in those areas that are showing strength.
Today’s Trading Landscape
Earnings to be reported include: ADC, Amerco, Collective Brands, Comtech Telecommunications, Copart, Cyberonics, Dynamex, Dyncorp Int’l, Gander Mountain Co, G-III Apparel Group, Greif Brothers, Joy Global, Martek Biosciences Corp, Mechel OAO, SAIC, Shanda Interactive Entertainment Ltd, Toll Brothers, and Williams-Sonoma.
Several economic reports are due today including Mortgage Refinance Applications for the week of May 29, May Automatic Data Processing (ADP) Employment Survey (the consensus expects negative 550,000), May Institute for Supply Management (ISM) Non-Manufacturing Index (the consensus expects 45.0), April Factory Orders (the consensus expects 1.1%), and the U.S. Energy Dept. Oil Inventories for the week of May 29.
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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.
