Stocks rose slightly Tuesday, and on a broad front, but with light volume. The Dow Jones Industrial Average advanced 0.1%, the S&P 500 gained 0.2% and the Nasdaq added 0.3%. The indices were boosted by better-than-expected new home sales for July and positive earnings reports from the retail group.
Volume was light as investors awaited the next clue from the Federal Reserve as to when interest rates will be hiked. Fed Chair Janet Yellen may provide one on Friday, when she is scheduled to speak at the Fed’s annual meeting in Jackson Hole, Wyoming.
Retail stocks led the market higher thanks to better-than-expected sales from Best Buy Co Inc (NYSE:BBY), which vaulted the stock 19.6%. This was especially surprising considering the Commerce Department said sales at electronics and appliance stores declined 3.9% in the second quarter.
The day’s other notable gainers included Chesapeake Energy Corporation (NYSE:CHK), up 6.1%, and Marathon Oil Corporation (NYSE:MRO), up 5.1%. Oil closed 1.5% higher at $48.10 a barrel on news Iran will join next month’s production meeting. However, in light of an increasing number of U.S. oil rigs, Goldman Sachs noted that crude will likely trade between $45 and $50 a barrel through next summer.
At Tuesday’s close, the Dow Jones Industrial Average rose 18 points to 18,547, the S&P 500 gained 4 points at 2,187, the Nasdaq was up 15 points at 5,260, and the Russell 2000 added 9 points at 1,249.
The NYSE Composite’s primary exchange traded 744 million shares with total volume of 3 billion. The Nasdaq crossed 1.5 billion shares. On the Big Board, advancers outpaced decliners by 2.1-to-1, and on the Nasdaq, advancers led by 1.9-to-1. Block trades on the NYSE increased to 4,768 from 4,125 on Monday.
The tech-heavy Nasdaq had a strong opening Tuesday that was accompanied by a small gap. But a lack of buyers couldn’t sustain the move, and the index closed slightly below the record close at 5,262.02, set on Aug. 15. There is still solid momentum, though, with advancers leading at a consistent 2:1 ratio.
The advance may be slow, but the Nasdaq is approaching its first nine-week winning streak in six years. Support is a bit difficult to see on this chart (my apologies), but is at a line connecting the lows at 5,195. Traders should keep that number and the closing high in mind as support and resistance areas.
Conclusion
I was reminded this week by Raymond James Chief Investment Strategist Jeff Saut about the basis for stocks moving higher: “In business school they teach you that over the long cycle stock prices are a function of two metrics: 1) corporate earnings, and 2) the price/earnings (P/E) multiple investors are willing to pay for those earnings.”
He also told readers that long-term stock returns are the result of earnings plus dividends.
So far, investors have chased dividends out of fear, thinking that income would support their bullish sentiment. But change is in the air, and that is a renewed focus on valuations. Companies will have to stop relying on stock buybacks and dividend increases to satisfy shareholders.
I believe that the “money in the wings” will break stocks from the narrowest trading range in decades as companies surprise investors with quarterly reports that result from massive spending and budget cuts. Many companies are “lean and mean” and ready to finally break from the low volume, fear-induced, dividend focus of the past several years.
From a purely technical viewpoint, Saut rightly pointed out that Bollinger Bands have contracted to their narrowest in decades. Since 1960, this phenomenon has occurred six times, and each time the markets have provided high returns over the next 12 months.
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.
