Yesterday, stocks started off very strong, with the Dow Jones Industrial Average (DJI) up more than 100 points in the first 30 minutes of trading. It finally looked like we would get the rally that everyone has been expecting after the drubbing on Monday. But then prices sagged until the FOMC announcement at 2:15 p.m.
And, at 2:15 p.m., the announcement that everyone expected, i.e., no change in rates, came. However, what almost no one could have predicted was the market’s response — it plunged. Within minutes the Dow’s triple-digit gain disappeared and, despite a minor rally, closed down for the day.
What seemed to bother investors were the Fed’s comments about the economy, which they said was “likely to remain weak for a time.” And, “economic conditions are likely to warrant exceptionally low levels of the fed funds rate for an extended period of time.”
Big deal. I wonder what folks thought that they were going to say. Perhaps they were expecting, “Well everyone, the recession is over and you can go back to work now.”
Durable goods orders for May were a very pleasant surprise, up 1.8% and topping estimates of a 0.9% decline. But May new home sales offset the good durable goods numbers. Sales of new homes fell at an annualized rate of 342,000 units, which was below the consensus estimate of 360,000 units.
There were several reasons for the decline in the Dow compared to modest advances in the S&P 500 (SPX) and Nasdaq (NASD). First was the cancellation by Boeing (BA), down 5%, of the first flight of its 787 Dreamliner, and then the 2% drop in American Express (AXP). But Nasdaq rose in response to Oracle’s (ORCL) better-than-expected earnings outlook.
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At the close, the Dow was down 23 points to 8,300, the S&P 500 gained 6 points to 901, and Nasdaq rose 27 points to 1,792. Volume barely topped 1.1 billion shares on the NYSE, but advancers were ahead of decliners by more than 2-to-1. Nasdaq traded 630 million shares, with advancers ahead of decliners by about 3-to-2.
August crude oil fell 57 cents to close at $68.67 in a volatile day of trading that had a high of $69.86. The Energy Select Sector SPDR (XLE) gained 19 cents at $47.22.
Gold rose $10.10 to $934.40 an ounce — breaking through its key moving averages and running higher despite strength in the U.S. dollar. The PHLX Gold/Silver Index (XAU) closed at $140.37, up $3.99.
What the Markets Are Saying
I’ve always liked taking a simple approach to technical analysis, such as, “When the market treats good news badly, watch out — a sell-off is coming.”
But yesterday’s results threw a monkey wrench into the works when the good news of the Fed continuing to support the economy was treated badly, the bad news of a continuation of lower new home sales was ignored, and the bad news of Boeing’s cancellation of the 787 Dreamliner flight was treated very badly by the Dow.
Meanwhile, the good news of Oracle’s forecast was treated well by Nasdaq and ignored by others. My mind is spinning.
And nothing is simple with the charts, either.
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For my take on what is happening with the S&P 500, see my Chart of the Day.
Yesterday, the Dow fell, and the S&P 500 and Nasdaq rose. Volume was very low again. Conclusion: The near-term downtrend is intact, but the action of the 500 and Nasdaq might be telling us that a move to the top of the trading zone at 930 is about to occur, giving sellers another opportunity to lighten up or take on new short positions.
So, until this pattern is resolved, the strategy is to sell at S&P 920 to 930, or sell on a breakdown close under S&P 880.
Today’s Trading Landscape
Earnings to be reported include: Accenture, Arcadia Resources, Christopher & Banks, ConAgra Foods, Finish Line, Flow International, Jackson Hewitt Tax Service, Lennar Corp., McCormick & Co., Micron Technology, Palm, Rand Logistics, Robbins & Myers, SMSC, Spectrum Control and Tibco Software.
Economic reports due: Q1 final GDP, initial jobless claims for the week of June 20 (the consensus expects +2,000), and June 1 EIA natural gas inventories.
Late news: Fed Chairman Ben Bernanke appears before Congress today, and may face some questions about the role of the Fed in the takeover of Merrill Lynch (MER) by Bank of America (BAC).
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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.
