Surprise! There Was More Action Than Expected Today
Generally speaking, Wall Street seemed forgotten, but there were individual stories that helped to set the stage for the real week's beginning on Wednesday. Welcome to the new quarter! Perhaps today's gains are indicative of where most Wall Street firms expect the markets to head in the second half of the year. Don't forget most analysts have price targets for the major indices at levels much higher than Friday's close. Even one of the more bearish firms in recent years spoke out about an impending rally today. Brown Brothers said they see a mild summer rally in the works where the S&P 500 may trade up to a new high. Pretty bullish statement from a firm that is now considering turning Bullish from Neutral, a rating they have held for some time.
That wasn't the biggest news of today's half session though as two items stuck out as market-movers. First, the NAPM was released at 10am EST. The report was favorable, as mentioned in detail below, and pulled the DJIA out of the red. It held the momentum from this news and spent the rest of the day in positive territory, even rallying into the close to finish right near the high. That late day rally was due to a newswire report that hit 25 minutes before the close and quoted the Saudi Oil Minister saying that they would increase production by 500,000 barrels a day immediately. This is on top of the production increase of two weeks ago and is good news to the ailing supply shortage. When all was said and done, the DJIA gained 122.78 to 10560.67 on volume of 450 million. Although this sounds light, it was better than most expected for a half-day ahead of the fourth of July and should be considered a plus. Advancers crushed decliners too, by a 20-8 margin.
The Nasdaq didn't fare as well, mainly to the dampened sentiment caused by Oracle (story below). It opened negative, but did find strength to rally at the same points as the DJIA. In the end, it too had gains, finishing up 25.28 to 3991.79. Yep, just a touch below the psychological 4000 level. Volume was light at 592 mln.
In an effort not to rehash the market outlook as Jim's comments from Sunday's Market Wrap are still valid, I will refer you back to that article for more insight. But, I have listed some of the key Nasdaq charts to show that everything is teetering right at a key resistance level. There is no guarantee that it will breakout any time soon, but it is important to note these levels in case a move does occur.
One catalyst for today's rally was softer-than-expected economic numbers from the National Association of Purchasing Management. The reading fell to 51.8 in June from 53.2 percent in May. This was better than the expected 53.2 estimate for June. A good dose of moderate softening in the manufacturing sector will help keep the Fed sidelined. It continues the evidence of "tentative and preliminary" signs of moderating growth the Fed mentioned in their policy directive with last Wednesday's FOMC conclusion. The bond market rallied on the news as the 10-year fell to 5.98%, but all eyes will now be on the June employment report due out on Friday. There is always something to worry about, right?
Oracle helped drag the software sector down slightly on Monday, thanks to the departure of their COO, Ray Lane. The announcement was actually made late Friday, but the stock reacted to the news today. ORCL gapped down $3 and continued to slide for the rest of the session before ending at $80.19, down $3.88. In a statement from Oracle CEO, Larry Ellison, he said "Lane would be missed", but failed to give any specific reason for his departure. The software index finished down 0.46%.
In acquisition news, May Department Stores will buy David's Bridal for $20 a share in a $436 million dollar deal. DABR surged 70% on the news to $19.75, but the Retail index lost 5.31 points today.
Some big movers in the session included JDSU +8.31, GLW +9.50, SDLI +8.69, ISLD +7.88, AKAM +7.15, AMD +7.00 and RMBS +6.69. Maybe more important moves came from the likes of Citigroup and JP Morgan as the financials began to recover. C gained $2.38 and JPM added $5.63. Telephonos De Mexico leaped $5.69 on news of the Mexican Presidential election results and Sprint gained ground on word that Duetsche Telekom is in preliminary talks with the company. FON finished $3.44 to $54.44.
So while today's action was far from "fast and furious", it did help to set the tone for the rest of the week. Good NAPM numbers and a surprise oil production move will both have positive effects. Wednesday should be interesting. I will be on the sidelines during amateur hour watching the action. I am curious to see if the professionals return to dump on the last two days of gains or if they are enticed enough to jump on board. I have two basic thoughts that I have been churning over the weekend. One, if so many firms still have lofty price targets for the year, will they turn into buyers as we enter the second half? If so, it is only a matter of time until the markets begin on what is already figured to be a strong fall rally. Traders may have a tough time waiting for that typical October entry. The flip side being those same analysts could start trimming those lofty forecasts, but I would consider this unlikely.
My second thought is more short-term and relative to the Fed. We don't have a July FOMC meeting to deal with and with the economic numbers cooling with each report, I am beginning to see room to rally before the August meeting. A benign Jobs report Friday may seal the deal. Earnings and splits should abound in July and that may be the new focus. As always, we need some sort of confirmation. I am a bull at heart, but would not be willing to really dive in until we had better action, say a close over the last rally's peak of 4075 on Nasdaq volume closer to 2 billion shares a day. Otherwise, be wise and stay on cautious in your trades. This is the kind of environment that can knockout you out of the game for over-committing.
That's the story for Monday. Have a great Fourth of July with friends and family. There will not be a Tuesday newsletter, but we will be back on market watch first thing Wednesday morning for you.