After four consecutive days of selling, the Dow Jones Industrial Average (DJI) finally put together a winning session yesterday. The Dow started off lower, but then suddenly reversed and, in series of steps, rose to the high of the day by early afternoon.
The general rally got its momentum from the retail group, which was led by Bed, Bath & Beyond (BBBY), up 9.48%. Earlier BBBY reported Q1 earnings of 34 cents a share versus analysts’ estimates of 25 cents.
But the Dow’s charge was the result of gains for Alcoa (AA), American Express (AXP), Home Depot (HD), Merck (MRK) and Pfizer (PFE). Of the Dow 30, 29 stocks had gains.
In addition to strength in the retail sector, homebuilders were also a focus of buying. Lennar Corp. (LEN) rose 17.52% after the company beat earnings forecasts and said that new homes orders jumped 63% during their second quarter.
Yesterday’s rally, though still lacking in volume, was broad-based with all 10 of the major sectors of the S&P 500 (SPX) able to achieve gains of more than 1%. Even the financials finally closed with a gain after lagging until the final hour of trading.
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Nevertheless, economic concerns, and especially unemployment, still hang over the market. Initial jobless claims for the week ending June 13 totaled 627,000, which is more than forecast and higher than the previous week. The Wall Street Journal reported that big companies are continuing to make “hefty cuts” to their payrolls. Kimberly-Clark Corp. (KMB) said Thursday that it plans to cut about 1,600 jobs.
At the close, the Dow was up 173 points to 8,472, the S&P 500 gained 19 points, and Nasdaq (NASD) rose 37 points.
The NYSE traded 1.2 billion shares, with advancers ahead of decliners by more than 4-to-1, while Nasdaq traded 690,000 shares, with advancers also ahead by 4-to-1.
What the Markets Are Saying
On Thursday, the “500” rose 19 points to above 920. This was expected and doesn’t change the near-term trend. It is still down.
Near-term we should be selling into this rally, but if the bulls are able to close the “500” over the 20-day moving average and the left shoulder top at 930, the near-term trend will change from “down” to “sideways.”
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In the absence of a dramatic high-volume breakout above 956, it is likely that even a sideways pattern will develop into a head-and-shoulders with a neckline (breakdown) at 880. I am not predicting that this will occur, but I think it important to alert our readers to the possibility so that they may take immediate action and sell hard on the breakdown.
On the bullish side, it is unlikely that the tepid volume that has accompanied almost every advance will be able to generate enough momentum to accomplish a major breakout. Thus, in the absence of a breakout or breakdown, the current pattern could continue through the summer.
Today’s Trading Landscape
Earnings to be reported include: AZZ Inc. (AZZ), Gerber Scientific (GRB), KB Home (KBH), Logility (LGTY) and Shaw Communications (SJR).
Economic reports due: May personal income (the consensus expects +0.2%), May personal spending (the consensus expects +0.4%), DJ-BTMU Business Barometer for June 13, and end of June Reuters/University of Michigan sentiment index (the consensus expects 69).
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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.
