Stocks opened June on a slow day of trading in anticipation of what could be mixed signals from economic data later in the week.
After a modestly higher opening due to rumors that Greece had reached an agreement with its creditors, a denial of those rumors and profit-taking drove stocks lower. The remainder of the day was spent attempting to recover the losses, but the rally was stymied in the last half hour by broad selling that took back most of the afternoon’s gains.
Despite apprehension regarding economic data, industrial stocks rose 0.5%, health care was up 0.4%, and technology gained 0.3%.
The Commerce Department said April personal consumption expenditures rose 0.1% for the smallest increase since October 2009. This is an important piece of data considering it is the Federal Reserve’s preferred inflation gauge. So this latest reading could influence regulators to put off an interest rate increase until later this year rather than in July or September.
According to FactSet, the S&P 500 is trading at about 17.8 times trailing 12-month earnings. This time last year it was trading at 16.8.
Broad selling hit the bond market Monday, which could be a positive for stocks since money always seeks the highest source of return. The yield on the 10-year Treasury note was up to 2.19% versus 2.10% on Friday.
Oil prices fell with the July light, sweet crude contract down 0.2%, settling at $60.20 a barrel. Gold fell $1.10 to $1,188.70 an ounce due to a gain in the U.S. dollar versus the euro.
At Monday’s close, the Dow Jones Industrial Average gained 30 points at 18,040, the S&P 500 rose 4 points at 2,112, the Nasdaq was up 13 points at 5,083, and the Russell 2000 rose 3 points to 1,250.
The NYSE traded total volume of 3 billion shares, and the Nasdaq crossed 1.9 billion. On the Big Board, advancers outpaced decliners by 1.2-to-1, and on the Nasdaq, decliners led by a small margin.
Monday’s sharp increase in yields broke the 200-day moving average and is evidence of a dramatic turn in bond prices. When bond prices fall, they release enormous amounts of cash, which institutional investors usually put to work, seeking the highest return for their clients.
The relationship between lower bond prices, higher interest rates and higher stock prices is well known. But it is not clear whether in the current market — with the Fed funds rate at close to zero — the impact will be the same.
It should be noted that on a day when bonds were sharply lower, the Dow Jones Transportation Average jumped. The chart is still bearish, but there appears to be a hint of a possible change in direction.
Note that MACD is oversold and turned slightly higher, as well. Investors should continue to follow any change in this relationship since it could have an impact on stocks.
We stock buyers are a curious lot in that we tend to get excited by stocks that are making new highs. We scour daily reports looking for breakouts, while bargains exist in high-quality stocks that are at annual lows.
We call buying at the highest price ever “momentum buying.” Yet, many of us would look to get the lowest possible price when, say, buying a new car. We might spend hours haggling over several hundred dollars at the dealership after spending thousands of dollars on the “breakout of the day.”
Where am I going with this thought? The Dow Jones Transportation Average is now selling at a six-month low with some stocks (mainly rails) that are high-quality bargains. Institutional traders are usually smart enough to take advantage of this situation, and that’s why I pay attention to volume and price changes in higher-quality stocks.
This week, I’ll take a closer look at the transportation stocks with some high-quality recommendations that are near annual lows. Bargain hunting takes patience but the rewards are worth it.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.