The combination of a weak Treasury auction, higher oil prices, and a poor economic report from the Fed’s Beige Book, sent investors scurrying yesterday. The Dow Jones Industrial Average (DJI) fell more than 100 points before a late rally cut losses to about a quarter of the decline.
The Treasury auction ran into trouble before its offering when the Russian Central Bank said that it would cut its U.S. Treasury holdings Yields on the 10-year note jumped to as high as 3.999%, the highest since mid-October, and have jumped almost 80 basis points in one month.
Financial stocks were hit the hardest, down 1.6%. With little in the way of other news, they took the brunt of the selling. And rising oil prices, though viewed earlier as a sign of a recovering economy, are now being interpreted as a sign of possible inflation, which could have a negative impact on the world economy.
The Dow closed down 24 points to 8,739, the S&P 500 (SPX) lost 3 points at 939, and Nasdaq (NASD) fell 7 points to close at 1,853. On the NYSE 1.2 billion shares were exchanged, with decliners ahead by 5-to-4. On Nasdaq, 720 million shares were traded, and decliners were ahead by 8-to-5.
July crude oil rose $1.32 to $71.33, the highest level for a spot month since last October. The Energy Select Sector SPDR (XLE) rose 47 cents to $52.97. June gold closed unchanged at $954, as higher oil prices were offset by a stronger U.S. dollar. The PHLX Gold/Silver Index (XAU) fell $1.03 to $150.10.
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What the Markets Are Saying
Yesterday, the S&P 500 made a fourth attempt to break through resistance at the 950 line and failed. Despite a last-half-hour rally, volume remains on the low side, and that’s the nub of the problem — there just aren’t enough buyers at the current level to sustain the breakout that was made in early June.
S&P’s technical analyst, Mark Arbeter, notes that the discretionary stocks have been hurt by the rapid increase in the price of gasoline, as well as the “spike in treasury yields.” He also comments that the retailers have run into “a mountain of chart resistance.” And that the “financials have also run into key overhead resistance and, after the huge rally that they have seen, we think some corrective action is certainly due.”
I’ve noted the same factors as Mark and commented recently that the amount of new offerings from the banks and financials is bound to create a situation where that market becomes saturated with too much product. And, as in any market, with more product than buyers, prices will probably fall.
Meanwhile, our internal indicators are all overbought while the sentiment indicators remain neutral. All of this is a recipe for a modest pullback with the first level of support at S&P 880.
A break above 950 could result in a rush to 1,000, but a break under 880 would most likely result in a major correction down to no less than 800.
The bull isn’t dead, but it looks like he needs a rest and some high-energy clover before charging ahead to new pastures.
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Today’s Trading Landscape
Earnings to be reported include: ArcSight, Chindex International, CPI Corp., Del Monte Foods, Global Crossing, Herley Industries, Hoku Scientific, lululemon athletica, MDS, National Semiconductor, New Frontier Media, Oculus Innovative Sciences, Repligen Corp. and School Specialty.
Economic reports due: Initial Jobless Claims for June 6 (the consensus expects -6,000), May Retail Sales (the consensus expects +0.5%), May Retail Sales, ex-autos (the consensus expects +0.4%), April Business Inventories (the consensus expects -0.8%), and DJ-BTMU U.S. Business Barometer for May 30.
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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 his most recent market outlooks.
