After Monday’s big sell-off, some traders thought that a recovery rally would drive stocks high enough to regain at least part of the losses. Instead stocks opened slightly higher, but by 11:15 a.m. had traded down 65 points to the low of the day.
The markets then gradually worked their way higher, and by the close recovered slightly more than half of the early losses. The recovery was led by the financial stocks, up 1.2%.
May existing home sales were the focus of most headlines. But instead of an expected increase of 3%, sales fell short at just up 2.4%. Even so, it was biggest increase since October; however the shortfall from expectations didn’t help stocks.
Despite the day’s narrow trading range, commodity futures rallied, and that had a positive impact on materials stocks. But the biggest gainer in the futures pits was crude oil, up 2.6%. Energy stocks gained 0.8%.
The Federal Open Market Committee (FOMC) concludes its two-day meeting today, and an announcement on interest rates will be made at 2:15 p.m. The Fed is expected to keep rates at their current levels.
At the close, the Dow Jones Industrial Average (DJI) was down 16 points to 8,322, the S&P 500 (SPX) gained 2 points to 895, and Nasdaq (NASD) fell just over a point to 1,765.
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Volume was again light with only 1.2 billion shares trading on the Big Board, with decliners just ahead of advancers. Nasdaq traded 667 million shares, but decliners outpaced advancers by a margin of 3-to-2.
August crude oil rose $1.74, closing at $69.24, and gaining as the result of another weak day for the U.S. dollar. The Energy Select Sector SPDR (XLE) closed at $47.03, up 28 cents.
Gold for August delivery rose $3.30 to $924.30, and the PHLX Gold/Silver Index (XAU) gained $5.32, closing at $136.39.
What the Markets Are Saying
Yesterday’s tepid response following a broad day of selling was not what the bulls needed at all. Instead of a round of bargain-hunting, volume was low, breadth on the NYSE, Nasdaq and S&P 500 was negative, and upside volume on the NYSE was 59% and 50% on Nasdaq.
At the very least, in light of Monday’s sell-off, the major averages should have been able to put together a plus day. Instead every exchange was mixed to lower and every market closed on weakness.
Even the S&P 500, which managed to gain 2 points, couldn’t make it back to the conjunction of the 50- and 200-day moving averages at 899.
Thus, the near-term reversals that began with the non-confirmations at the tops on June 11, and started the current near-term downtrend, are reinforced by yesterday’s cool response.
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The next area of support remains at the 880 line on the S&P 500. There was a significant amount of trading (about three weeks) at that level, so the chances are high that the first tests will result in a rally. But if the market rushes through 880 on a pickup in volume, be prepared to put on some heavy shorts, because the next support doesn’t show up for another 55 S&P points.
This near-term reversal is just what the doctor ordered for those who are looking for bargains in a market that has run too far, too fast.
For those patient investors seeking long-term gains, stocks are likely to pull back to prices that will again be attractive, while rallies provide opportunities to write options or take profits. And for traders who are looking for day-to-day action, any small rally is a good opportunity to jump on a reverse ETF. There is something here for everyone.
Today’s Trading Landscape
Earnings to be reported include: American Greetings Corp., Bed Bath & Beyond, CKE Restaurants, Darden Restaurants, Herman Miller, Mad Catz Interactive, Monsanto Co., Nike, Omnova Solutions, Paychex, Red Hat and Rite Aid Corp.
Economic reports due: June 1 Mortgage refinance applications, May durable goods orders (the consensus expects -1.5%), May new home sales (the consensus expects +2.6%), and June 1 U.S. Department of Energy oil inventories.
Late news: Oracle (ORCL) reported a 7% dip in profits but beat analysts’ estimates.
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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.
