Stocks ended July in sluggish fashion, but that was forgotten on Monday as European bank earnings and renewed economic optimism lifted the S&P 500 to to gain of 24 points, or 2.2%, helping the index extend an almost 7% gain notched in July. The close at 1125.86 is the best for the index since May 17. The Dow Jones Industrial Average surged 208 points, or almost 2%, to settle at 10.674 and the Nasdaq added almost 41 points to close at 2295. Small-caps enjoyed a decent day as well with the Russell 2000 gaining nearly 11 points to close at 661.86.
The economic data points released were a big contributor to the rally enjoyed by equities. Construction spending surprisingly rose by 0.1% in June, according to data released by the Commerce Department. Economists had been expecting a decline of 0.5%. For 2010, total construction spending is basically flat, but some noteworthy gains have been seen on the residential side and that might be a sign that things are not as bad as some worry warts would like to believe.
The Institute for Supply Management released its manufacturing reading for July and that number fell to 55.5 from 56.2 in June, beating the median forecast of 54.5. Despite the fact that the ISM booking metric, viewed as one of the more important indicators, fell to a one-year a low, investors seemed more impressed with the fact that the July number came in above 50, which is considered a bullish reading. New orders slumped to 53.5 in July from 58.5 in June and inventories rose, neither being good signs, but for one day at least, the ISM report was viewed as positive.
Speculation that the global economic recovery is for real is big news for copper as the red metal continues on a torrid pace. Copper for September delivery traded on the New York Mercantile Exchange rose 7.8 cents, or 2.36%, to $3.3895 per pound after earlier touching $3.3965, good for the highest closing price since April 28. Keep in mind that copper put in this rally just two days after China said manufacturing contracted in July. That is the first time China has seen a manufacturing contraction since March 2009.
Analysts believe copper caught a bid from, believe it or not, western economies. The ISM number certainly helped today as did news that the Eurozone manufacturing purchasing managers index rose to 56.7 in July from 55.6 June. Not surprisingly, Germany was a big reason, but Italy also factored into that equation.
There are more reasons to like copper. The London Mercantile Exchange said inventories fell by 425 tons today to 413,075 tons. In the U.S., COMEX copper stocks lost 102 short tons to 100,727 tons as of last Friday and the Commodity Futures Trading Commission is reporting that speculators doubled their net long exposure to copper for the week ending July 27.
Spurred by the jovial economic news and the Dollar finding its way to a three-month low, crude oil found its way to a close above $80 a barrel, the first time that has happened since May. Some analysts maintain the view that oil needs to move above $82.50 a barrel to finally leave the $70-$80 range in the dust, but Monday's trade is a step in the right direction for oil bulls.
Speaking of oil, a combination of news that BP (BP) is preparing to start its latest attempt to plug the Macondo well, a $498 million asset sale and overall bullish sentiment sent Anadarko Petroleum (APC) to a gain of $4.11, or 8.36%, for a close at $53.27. Anadarko, the second-largest U.S. independent oil and gas exploration firm, said it will sell $498 million in Colorado assets to Texas-based Western Gas (WES), a master limited partnership.
Anadarko and Western Gas apparently have a cordial relationship as this is the third deal between the two companies in the past year. In February, Anadarko sold $254.4 million in assets to Western and that transaction was preceded by a $107 million deal in July 2009. In the essence of full disclosure, count me among those that was not happy to see Anadarko soaring today. I am short a straddle that involves the August 57.50 calls and with Anadarko reporting second-quarter earnings tomorrow after the close, I expect to be quite nervous over the next couple of days.
Finding losers among the energy and materials sectors was difficult to do today and of course on a day when copper was so strong, I would be remiss if I did not mention Freeport McMoRan (FCX). A lot of companies have soundly beat earnings estimates and gone on to stay flat or even trade lower following those reports, reducing the number of post-earnings trades from the long side.
Freeport McMoRan flies in the face of that logic. Just days before its July 22 second-quarter update, Freeport was trading below $60. The bulls ran into the stock in a big way from July 19 through July 22, sending it over $66. The shares traded over $75 today before closing at $74.80, just below the 200-day moving average. Dwindling copper stockpiles and rising prices are a sweet recipe for Freeport shares, that is a given.
If market sentiment stays positive and copper inventories keep falling, Freeport could challenge it's April peak just below $90 in the near-term. I have included the Freeport chart below, but will recommend another equity-based copper play for readers that choose not to be involved with copper futures or thinly-traded copper ETNs: The iShares MSCI Chile Investable Market Index Fund (ECH). ECH is the lone country-specific ETF for Chile and Chile is the largest copper exporter in the world. ECH hit a new 52-week high today on more than twice the average daily volume.
Freeport McMoRan Chart
A world away from the commodities realm, health insurance provider Humana (HUM) was another one of Monday's juggernauts, jumping $1.71, or 3.64%, to $48.73 on volume that was about 50% higher than the daily average. The company said its second-quarter profit rose 21% to $340.1 million, or $2 a share, form $281.8 million, or $1.67 a share, a year earlier. Revenue surged 9.5% to $8.65 billion from $7.9 billion. Analysts had been expecting a profit of $1.67 a share on revenue of $8.61 billion.
Better yet, Humana raised its full-year guidance to $5.65 to $5.75 a share from previous guidance of $5.55 to $5.65 a share. Analysts had been forecasting a full-year profit of $5.71 a share.
Taking a look at the charts, the S&P 500 closed right at support at 1100 last Friday, but blasted higher from there on Monday and was able to move above resistance at 1115. The close above 1125 is another encouraging sign as it puts the index within earshot of 1130, an area that if taken out on a strong volume, could induce plenty of sideline dwellers to get into the game. There are plenty of big-names reporting earnings this week, but the economic calendar will probably play a bigger roll in the S&P 500's weekly result. The ISM services report is due out on Wednesday and this Friday is the first Friday of the month, meaning non-farm payrolls are due out before the market opens.
S&P 500 Chart
A 200-point move for the Dow is usually an impressive feat, particularly on a day with no earnings news and that is just what the Dow delivered on Monday. Trading just below 10,675, the blue chip index barreled through resistance at 10,500. Support is still the 200-day moving average at 10,415. Most Dow members have already delivered earnings report, but Pfizer (PFE) and Procter & Gamble (PG) report on Tuesday.
Not to be trite, but I do not expect the Pfizer report to do much for the Dow, especially on the upside. It takes an act of God to move this stock and since Procter & Gamble has already raised its dividend, I would not be depending on that name to spark the Dow higher by a substantial margin either. Kraft (KFT) and Walt Disney (DIS) report on Thursday.
The Nasdaq flirted with resistance at 2300 today before settling just below that number at 2295, but it has to be noted that the Nasdaq's strength has been impressive in the wake of several downgrades of the semiconductor sector. There is other news to watch with the Nasdaq this week that does not involve earnings (the Nasdaq earnings calendar is pretty light this week).
I would be keeping an eye on Research In Motion (RIMM) as it locks horns with Saudi Arabia and the United Arab Emirates on Blackberry service in those two countries. Beyond that, biotech will be in play as news crossed the wires on Monday evening that French pharma giant Sanofi-Aventis (SNY) has made a $69 per share to acquire Genzyme (GENZ). Genzyme is the biggest maker of drugs to treat rare genetic disorders and given the complex formulas the company uses to make those treatments, it is not overly vulnerable to generic competition, making Genzyme particularly appealing to a traditional pharma suitor.
Support on the Nasdaq is 2225.
Sure, the Russell 2000 was higher today, but the index could not make its way above resistance at 668, so I maintain my stance that only a move above 675 would be truly exciting for small-caps. Support looks firm at 640.
Russell 2000 Chart
After Monday's move, the S&P 500 is close to being overbought and that is not unreasonable to expect after July's 6.9% run. A move above 1130, which could happen as soon as tomorrow, would only bolster the bulls further. As I said last week, my gut tells me economic data points, not earnings, are going to drive stocks for the next few weeks and that puts a lot of emphasis on Friday's job report. A positive number that includes some signs of private sector job growth could lead to a strong August. A disappointing number will have the opposite impact.