August began with a triple-digit gain for the Dow Jones Industrial Average as investors rushed to buy more speculative stocks. Reports from Europe of solid PMI readings and strong income growth led to gains of 2% to 3% in their exchanges on Monday, and those gains encouraged U.S. investors to take the plunge.
Along with the better returns from Europe’s exchanges, China’s stock markets gained 1% despite weaker PMI readings.
The ISM manufacturing index reported a better-than-expected July at 55.5 versus an expected 54.2. The bottom line was helped by an unexpected climb in June construction spending, which increased by 0.1% where a decline of 0.8% had been expected.
Alcoa Inc. (NYSE: AA) rose 4.8% and led the Dow components. And E.I. du Pont de Nemours & Company (NYSE: DD) rose 2.3%. But it was the energy stocks that had the biggest gains with Exxon Mobil Corporation (NYSE: XOM) up 3.4%, Chevron Corporation (NYSE: CVX) gained 2.07%, and BP plc (NYSE: BP) rose 2.6%. The energy sector rose 3.6%.
Financial stocks also did well. Bank of America Corporation (NYSE: BAC) gained 2.9%, and JPMorgan Chase & Co. (NYSE: JPM) rose 3.4%. The big British bank, HSBC Holdings plc (NYSE: HBC), rose 5.21% following a first-half report that showed earnings of $6.8 billion for the six months ending June 30, which easily beat analysts’ estimates.
Telecommunications stocks rose with Sprint Nextel Corporation (NYSE: S) up 2.4% and AT&T Inc. (NYSE: T) gaining 2.5%. The technology sector rose, as well. Hewlett-Packard Company (NYSE: HPQ) gained 3.3% and Cisco Systems, Inc. (NASDAQ: CSCO) rose 3.2%. Intel Corporation (NASDAQ: INTC) was up 2.7%.
However, at the Southern Legislative Conference, Federal Reserve Chairman Ben Bernanke said that the United States had a “considerable way to go to achieve a full recovery in our economy, and many Americans are still grappling with unemployment, foreclosure and lost savings” (Wall Street Journal).
The Dow Jones Industrial Average gained 208 points, closing at 10,674, the S&P 500 rose 24 points to 1,126, and the Nasdaq was up 41 points, closing at 2,295.
The NYSE traded just over 1 billion shares with advancers over decliners by 5-to-1. The Nasdaq crossed 545 million shares with advancers in the lead by 2.5-to-1.
Crude oil for August delivery gained $2.39, closing at $81.34 a barrel, and the Energy Select Sector SPDR (NYSE: XLE) spiked up $1.88 to $55.72. XLE is approaching resistance at the 200-day moving average at $56.39.
December gold rose $6.30 to $1,190.20 an ounce. The PHLX Gold/Silver Sector Index (NASDAQ: XAU) closed at 170.19, up 0.47 points.
What the Markets Are Saying
Yesterday’s broad buying sent the Dow and NYSE Composite through their 200-day moving averages, as well as the June highs. So the intermediate trend in these indices has changed from sideways to up. But despite a very good start to the month for the S&P 500 and Nasdaq, they have not yet broken out.
There is no question that the trend appears strong, but just like the aborted head-and-shoulders plunge of July 2, these indices have not yet completed the needed breakout that changes their outlook. Going back to July 2, our regular readers may recall my caution when it appeared that the S&P 500 had broken down from a head-and-shoulders top. But, in order to have a confirmed head-and-shoulders, we must have at least a 3% penetration of the neckline. The pseudo head-and-shoulders of July fell 2.5%, just missing the final ingredient of a completed signal by 0.5%. But that small margin was enough to abort the entire formation and the S&P 500 turned north.
What is needed now for an intermediate broad market turn north is that all of the key indices — Dow, S&P 500 and Nasdaq — must break above their 200-day moving averages, as well as the June 21 high, before their trend changes. Additionally, the Dow must close above the left shoulder high of Jan. 14 at 10,710, and the S&P 500 must breach the close of Jan. 18 and 19 at 1,150.
With our internal indicators now grossly overbought, this is no time to become overly bullish. Volume is still very low, casting doubt that this move will result in a major market reversal. The long-term trend is still down, the intermediate trend is still neutral, and the near-term trend is up.
Today’s Trading Landscape
Earnings to be reported before the opening include: Acorda Therapeutics, AGA Medical, Allied Healthcare, Allis-Chalmers Energy, American Tower, Archer-Daniels Midland, ArvinMeritor, Atlas Air Worldwide, Baker Hughes, Bill Barrett, Boyd Gaming, Bridgepoint Education, Calgon Carbon, Caliper Life Sciences, Cedar Fair, Clorox, Coach, Cognizant Technology, CommVault Systems, Dean Foods, Discovery, Dollar Thrifty, Dow Chemical, DR Horton, Duke Energy, Emergency Medical Services, Emerson Electric, Entergy, Evercore, First American Financial, FirstEnergy, Fresh Del Monte, Gaylord Entertainment, Genesee & Wyoming, Glatfelter Co., Great Wolf Resorts, HCP, Headwaters, Health Net, Hercules Offshore, Impax Labs, Inland Real Estate, IPG Photonics, Landauer, Lear, Lexington Realty Trust, Magellan Midstream, Marathon Oil, Marsh & McLennan, Martin Marietta, MasterCard, MDU Resources, MEDNAX, MFA Mortgage, MGM Resorts, Molson Coors Brewing, Nicor, NiSource, NYSE Euronext, Och-Ziff Capital, OfficeMax, Overseas Shipholding, Pantry, Parker-Hannifin, Pennsylvania REIT, Petrohawk Energy, Pfizer, Pinnacle Airlines, Pinnacle West, POZEN, Procter & Gamble, Radian Group, Rowan Companies, RTI International Metals, Scotts Miracle-Gro, Sempra Energy, Sirona Dental Systems, Smith International, Solarfun Power, Spirit AeroSystems, Steris, Tenet Healthcare, Trex, Unit Corp., Venoco, Vishay Intertechnology, Vornado Realty Trust, W&T Offshore, West Pharmaceuticals, Westlake Chemical and YRC Worldwide.
Earnings to be reported after the close include: American Capital, American Medical Systems, American Reprographics, AmeriCredit, Anadarko Petroleum, Aqua America, Arena Pharmaceuticals, Avalonbay, Axis Capital, Bio-Rad Labs, Black Box, Boston Beer Co, BRE Properties, Brigham Exploration, BTU International, Buckeye Technologies, CAI International, Cambrex, CBL & Assoc, CBS Corp., Celera, Chesapeake Energy, Denny’s, DexCom, DigitalGlobe, Drugstore.com, Echelon, Electronic Arts, Enzon Pharmaceuticals, Esco Technologies, Exactech, Exco Resources, FelCor Lodging, First Financial Bancorp, Force Protection, Glu Mobile, Harris, Hertz Global, j2 Global, Jarden, KAR Auction Services, Kenexa, kforce.com, Landec, Leap Wireless, LECG Corp., Liberty Global, Liquidity Services, MAKO Surgical, Masimo, Matrixx Initiatives, McCormick & Schmick’s, Mercury Computer, Molex, Morton’s Restaurant Group, Mueller Water, National CineMedia, National Interstate, Novatel Wireless, Oil States, ONEOK, ONEOK Partners, OpenTable, Peet’s Coffee, Pitney Bowes, Priceline.com, Primerica, Protective Life, RehabCare, Rentrak, Republic Airways, Savient Pharmaceuticals, Sonus Networks, SS&C Technologies, STEC, Super Micro Computer, Team, Ternium S.A., True Religion, Universal Technical Institute, Unum Group, USEC, Watts Water, Web.com, WebMD Health, Whole Foods, WMS Industries, World Fuel Services, XL Capital, ZipRealty and ZymoGenetics.
Economic reports due: motor vehicle sales (the consensus expects 8.8 million), ICSC-Goldman Sachs store sales, personal income and outlays (the consensus expects 0.1% for each), Redbook, factory orders (the consensus expects -0.5%), and pending home sales.
If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.
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