The lack of news and disappointment over the market’s inability to close higher on Friday — despite a favorable jobs report — led to a weak opening yesterday. In just minutes the Dow Jones Industrial Average (DJI) was trading more than 60 points lower, and, by the end of the first hour, was off by more than 120 points.
But the financial stocks helped stabilize the broad market, as buying anticipated the Fed’s announcement on companies that will be allowed to repay TARP funds. American Express (AXP) led the banking charge, up 2.81%, with J.P. Morgan Chase (JPM) not far behind, up 2.43%.
Technology stocks were lower throughout the session, with Apple (AAPL) off 82 cents despite a new iPhone introduction and reduction in the prices of other Apple products. And Palm (PALM) fell after releasing a highly anticipated mobile phone that was touted as a challenge to Apple’s iPhone.
After the initial sell-off, stocks traded flat until just before the close when a short-covering rally ran stocks from their lows, but failed to overcome the heavy losses of the early morning.
The 10-year Treasury note fell 17 ticks to yield 3.89%, up from 3.86%. This week, the Treasury plans to sell another $65 billion in various maturities, which should add to the pressure on bonds and send interest rates even higher.
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At the close, the Dow was up just more than a point at 8,764, the S&P 500 (SPX) fell a point to 939, and Nasdaq (NASD) was down seven points to close at 1,842. The NYSE traded just over 1 billion shares, with decliners ahead of advancers by 9-to-5. On Nasdaq, only 611 million shares traded, and decliners there were ahead by 8-to-5.
Crude oil for July delivery fell 35 cents, ending the day at $68.09 a barrel, and the Energy Select Sector SPDR (XLE) fell 12 cents to $51.99. August gold fell $10.10 to $952.50 an ounce as the U.S. dollar rallied, and the PHLX Gold/Silver Index (XAU) rose 41 cents to $151.08.
What the Markets Are Saying
Even though the financial stocks tended to stabilize yesterday’s broad market, the late-day buying appeared to be just a round of late short-covering. After months of positive news, or news that was treated well by the sector, banks have lagged the market in the last month.
And that makes sense: I’ve said several times in the past month that a market, any market, can only take so much new capital in the form of equity offerings before prices collapse.
Geoffrey Rogow of Dow Jones Newswires pointed out this fact yesterday, saying, “But raising capital, while helping the bank’s balance sheet, dilutes current shareholders and has historically been followed by stock declines. Last week’s return to this typical paradigm shows sentiment has shifted back to being skeptical on large banks, which is not so welcome news for their shareholders.”
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And Philip Roth, chief technician at Miller Tabak & Co., said that the worst technical patterns are for some of the money-center and regional banks, which jumped dramatically only as a result of having fallen so hard.
The Financial Select Sector SPDR (XLF) has a particularly nasty pattern, having failed to penetrate the resistance at $13 to $14, and has turned away from its 200-day simple moving average.
It will take some time for the market to absorb all of the new equity, so, for now, we’ll stay away from the banking sector.
Today’s Trading Landscape
Earnings to be reported include: 99 Cents Only, CRA International, GigaMedia Ltd., Korn Ferry International, Lakeland Industries, ModusLink Global Solutions, Movado, Navistar International, NCI Building Systems, Oxford Industries, Rentrak Corp., Rex Stores Corp., Shuffle Master, SINA Corp., Streamline Health Solutions, Talbots and Titan Machinery.
Economic reports due: ICSC Chain Store Sales Index for June 6, Redbook Retail Sales Index for June 6, April Wholesale Trade (the consensus expects -1.2%), June 5 API Oil Industry Report, and ABC/Washington Post Consumer Confidence for June 6.
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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.
