In the essence of keeping things simple, Monday was a nice day for the market, albeit on the light volume typical of a week leading into a holiday. Maybe it was Bernard Madoff's 150-year sentence for his orchestration of the biggest Ponzi scheme in US history that put buyers in a chipper mood. Perhaps it was the fact that the second quarter ends on Tuesday and fund managers may have been scurrying into stocks to bolster returns. Or maybe it was the familiar notion that things seem less bad than previously thought.
Regardless, buyers were in charge today and that sent the Dow up almost 91 points, or 1.1%, to 8529.38. The Nasdaq inched higher to close at 1844.06 and the S&P 500 closed up 8.33 points to 927.23 after two consecutive weekly declines. As it stands, this is the best quarterly performance for the S&P 500 since 1998.
While just how optimistic investors truly are remains to be seen, it is worth noting that the Chicago Board of Options Exchange Volatility Index, or VIX as it is commonly known, lost 2.5% to close at 25.29. The VIX measures the cost of using options to hedge against S&P 500 equity declines and is commonly regarded as a gauge of investor fear. Some press reports noted today's close for the VIX was below that of the day before the collapse of Lehman Brothers.
Monday was not an eventful day in terms of economic data, but that does not mean the rest of the week will be similarly light. Due to the Independence Day holiday, June unemployment data will be released this Thursday instead of the usual release date of Friday. Economists surveyed by Bloomberg News believe the jobless rate grew by 0.2% in June, but in the familiar refrain of less bad, that is the smallest monthly jump since November 2008.
Heading into second-quarter earnings, a positive surprise on the jobs front could be just the catalyst the bulls need to bid stocks higher. And catalysts will be needed to be sure. Today's light trading volume, while attributable to the looming holiday, could also be a sign that the summer doldrums are about to set in and given the market's sterling performance since March, many would argue the market is due for a breather. That makes Thursday's jobs number and the subsequent earnings releases all the more important for the bulls.
In another sign that the worst of bad news may have passed, Federal Reserve Bank of Boston President Eric Rosengren said today that US GDP may turn positive in the second half of this year, and if that proves to be the case, it could mean more fuel for the bulls' fire. Reports last week from the International Monetary Fund and World Bank indicated it may take the global economy longer to recover than previously expected, but if output starts to perk up in the U.S., that will likely be good news for the rest of the world.
At this point, any good news on the GDP front will be welcomed as the past couple of quarters have brought substantial declines in US ouput. Consumer confidence data for June is released on Tuesday and the estimate is for a reading of 55.3 compared to a May reading of 54.9. While not necessarily of harbinger of what to expect from the next GDP release, improved consumer sentiment is not something the market is apt to just shrug off. Take a look at the GDP chart below to get an idea of good news of any kind is welcomed.
Certainly not weighing on the market's fortunes today was the pop in crude oil. Remember the days when there was a distinct divergence in the performance of black gold and the broader market? One would move higher, the other lower and vice versa. These days it appears as though the market and oil are joined at the hip. Well, that might be a touch of hyperbole, but news that Nigerian rebels attacked a Royal Dutch Shell (RDS-B) platform in that country sent light, sweet crude for August delivery higher by 3.4% to close at $71.49.
Exxon (XOM) and Chevron (CVX), both Dow members and the two largest US oil producers, advanced 2.2% and 1.4%, respectively. Oil is headed for its largest quarterly gain in 19 years, some press reports noted. That made the tepid trade in the Oil Services HOLDRs ETF (OIH) all the more curious today. Oil services stocks are deeply correlated to the price of crude and a close above the psychologically important $70-a-barrel level should have sparked more buying in the OIH. The ETF closed up a mere 5 cents to $99.13, below its 50-day moving average at $99.66.
OIH has not closed above $100 since June 19, and as I noted last week, its holdings may be taking a breather. Given recent trade in the ETF and major oil services stocks, crude probably needs to climb to $75 in the short-term to renew buyers' interest in this group. Oil services stocks are more volatile than their exploring and producing brethren like Exxon and Chevron, so buyers do need some impetus to get involved with the group.
There was also some acquisition news out of the oil sector on Monday as Enterprise Products Partners LP (EPD, EPE) said it will purchase Teppco Partners LP (TPP) for $3.3 billion in stock, forming the nation's largest publicly traded energy partnership. The combined company will keep the Enterprise Products name and own 48,000 miles of crude oil and natural gas pipelines. Teppco previously rebuffed a $2.8 billion overture from Enterprise, but apparently could not say ''no'' this time around.
In other sector news from Monday, and feel free to be surprised, financials had the biggest gain among 10 major industries. Perhaps not so hard to believe considering the dour levels that they sank to is the fact that financials are the best performers since the March lows, nearly doubling since March 6. After all, this was the most downtrodden of sectors. Perhaps the market is signaling the worst of the credit crisis is behind us and that banks have taken a bulk of their expected write-downs to cover losses related to the subprime mortgage fiasco.
The KBW Bank Index (BKX), a measure of the 24 largest US banks, rose 58 cents to $36.99 today. That close puts it above its 50-day moving average of $36.45 and puts the 200-day moving average of $40.44 within reach in the near-term.
There was at least one positive catalyst for the financials today and that news emanated from where else but Goldman Sachs (GS). As I noted in the Market Monitor today, a FBR Capital Markets report said that Goldman, along with rival Morgan Stanley (MS), is flush with cash. Those record bonuses are not coming out of thin air, you know. FBR used the term ''overcapitalized'' to describe the cash positions for the two largest US investment banks and said Goldman holds between $6.6 billion and $8.6 billion in excess cash. That means the company could buyback as much as 11% of its outstanding shares.
While not nearly as impressive as Goldman, Morgan Stanley holds a tidy $1.5 billion in excess cash, though that sum could increase significantly as the company unwinds its stake in China Investment Corp. FBR said Morgan Stanley could have between $6.1 billion and $7.5 billion in excess cash by 2010 after unloading its China Investment holdings and that sum would be good enough to repurchase as much as 14% of its stock. Please note that neither company has made announcements regarding share buybacks. That was merely an anecdote from the FBR report.
Although the Nasdaq closed up only fractionally today, Microsoft (MSFT) was in the news. The world's largest software maker is looking to shed its Razorfish Internet ad agency and press reports are saying Publicis Groupe of France is a potential buyer. One analyst said Microsoft could fetch $600 million to $700 million for Razofish. Microsoft closed up 51 cents to $23.86, but the real story here is the impending release of its new operating system, Win 7.
Microsoft is up sharply since March and the company has over $23 billion in cash, giving it one of the strongest balance sheets in the U.S. If Win 7 proves to be a winner and prompts a new upgrade cycle, the stock could return to $30, a level it has not seen in over a year. The shares are well above both the 50 and 200-day moving averages and $25 represents some psychological resistance. A break above $25 could be just what the stock needs to march even higher.
Looking ahead to Tuesday's trade, as previously noted, the Conference Board releases June consumer confidence data. That news is released at 9 AM New York time. The S&P/Case Shiller Home Price Index is also released at 9 AM and the expectation is for a decline of 18.63% for April after an 18.7% decline in March. The Chicago Purchasing Managers Index is expected to rise to 39 for June compared to 34.9 in May, a sign that manufacturing may be starting to rebound.
Stocks to watch include for-profit education provider Apollo Group (APOL), which reported fiscal third quarter results after the close today. I mentioned in the Market Monitor that the company was a candidate to beat estimates of $1.12 a share and it did, earning $1.26 a share. After closing down 4% during regular trading, Apollo was up the same amount in after-hours trading.
H&R Block (HRB), the largest US tax preparer, also reported results after the close Monday and the company said fiscal fourth-quarter profits rose 26%. On a per share basis, that was good for $2.09, better than the $2.05 forecast by analysts tracking the company. H&R Block said it expects to earn $1.60 - $1.80 per share in fiscal 2010. Analysts are currently calling for $1.64 a share.
Taking a look at market technicals, the S&P 500's visit below 900 was brief and the index again rests comfortably above its 50 and 200-day moving averages. Monday's close at 927.23 likely means 920 is the new support area. Oddly enough, 920 seems to have been alternating as support and resistance since May and even if a move to the 940 area is made, significant resistance awaits at 950.
Perhaps the best chance the index has to break that barrier this summer will come at the height of earnings season. Positive surprises could be just what the doctor ordered to combat lukewarm summer trade and send the S&P 500 above 950. In other words, 950 needs to be tested and broken sometime in the next several weeks or a move back down below 900 is possible.
Monday's close sent the Dow above its 50-day moving average, but the 30-stock outfit still rests below its 200-day moving average of 8479.80, which is probably a resistance point as well. Support is obviously in place at 8300. Aluminum giant and Dow component Alcoa (AA) kicks off second-quarter earnings for the index next Tuesday, but since Alcoa doesn't even trade for $11 and the Dow is a price-weighted index, even an upside surprise won't take the Dow to 8600, another critical resistance level.
Earnings reports, particularly from financials such as American Express (AXP), Bank of America (BAC) and JP Morgan Chase (JPM) are going to be what Dow watchers focus on in the coming weeks. If the Industrials are to make a serious run above the 8600 area, as I so often say, it needs to happen sooner rather than later.
The Nasdaq seems well-supported at 1800, but some consecutive closes above 1850 would be nice and that didn't happen with Monday's close of 1844.06. The moving averages are not much of a downside concern right now, so a run to 1865 is probably what the bulls want to see to get excited again. That said, a break above 1900 would be a surprise, at least in the short-term.
The psychologically important level of 1900 could be eclipsed if the tech-laden Nasdaq can first make a run to 1880, which it saw earlier in June. A few closes in that range and some decent earnings surprises could take the index to 1900 in short order, but I would not bet the farm on that happening.
With a new earnings season nearly upon us, these important technical levels become even more highly regarded. Second quarter earnings are the perfect catalysts to give the market direction for the rest of the summer and perhaps the year. If the bulls are really going to turn the corner, ''less bad'' is not going to cut it. A cool summer and a positive 2009 hinge on how many companies beat results and how many offer upside guidance for the rest of the year.