The day and the third quarter opened on a positive note, no doubt spurred by the news that the S&P had posted its biggest quarterly gain in a decade. Some of the bounce could have been a reaction to Tuesday's selloff after the disturbing Consumer Confidence survey, but let's try to be optimistic. Giving an assist today was the fourth straight monthly rise in pending home sales. Also helping, despite one disappointing component, was the monthly report from the Institute for Supply Management, which showed some stabilization in manufacturing activity.

Today's Market Statistics:

The ISM's manufacturing index rose to 42.8 in May, much as expected, to its highest level since September 2008 and up more than two points over April's 40.1, although still in just-negative territory. A reading of 50 or higher means growth in the manufacturing sector, a level above 43 or so but below 50 tells us the U.S. economy is still growing even though the manufacturing sector is contracting and below 43, your economy is in recession

The index was expected to climb by roughly two points a month until it hit 50 sometime in the third quarter. But the index's new order level may cause revision to that view, given its nearly two-point decline to 49.2, a sub-50 reading indicating that more survey respondents reported a month-to-month decline than a gain. (The report gathers information on manufacturing production, new orders, supplier deliveries, inventories and employment.)

The big plus was production, up 6-1/2 points to 52.5 and the biggest factor in the index's improvement. At the same time customer inventories were down 2-1/2 points to 43.5, another bright spot. Another important factor was a big jump to a solid 50 reading for prices paid, which should help cool concern over deflation. Markets paid no lasting attention to the report, probably focusing on the weakness in new orders.

ISM Manufacturing Index:

In other reports, the best that can be said for pending home sales, a leading indicator of sales of existing homes, is that the monthly gain was nothing much but that year-over year it showed a nice gain of 3.2%. So no big improvement, but no big drop either.

Bleaker were the week's mortgage applications. That index fell a surprising 4.5% in the week ending June 26, to 267.7. The refinancing index is back at an 18-month low of 1,482.2, down 30% on the week, despite a slight decline in mortgage rates. The residential and commercial building sector, though, seems to have been holding its own for the last two months and is well off March lows:

In keeping with that, construction outlays in May slid into negative mode after April's big boost, slipping 0.9%, worse than the market expected, after rising 0.6% in April. The reversal in outlays in May was led by a 3.4 percent drop in residential outlays, while nonresidential outlays gained 0.5%. Still, residential and commercial building stocks are decidedly off their lows, as this chart of the sector shows:

Residential and Commercial Building:

Overall, construction is still is in the doldrums as homebuilders wait for unsold supply to dwindle and commercial builders remain stymied by lower corporate profits. More promising and maybe a little surprising is the building products sector, which has left its troughs behind and gone straight up for the last week or so. We'll have to wait for the next housing reports to see what, if anything, this recent spike signifies:

Building Products:

Crude oil supplies fell 3.7 million barrels in the June 26 week to 350.2 million, according to the Energy Information Agency's latest report. Petroleum products, however, saw a big jump in weekly inventory data with gasoline up 2.3 million barrels and distillates up 2.9 million: firm output, only fair demand. Demand for gasoline is up only 0.9% year-over-year while demand for jet fuel is down 9.4%. Could it be that Americans are actually using less gasoline and liking it? Could this last? Oil fell 75 cents to $71 in immediate reaction to the results, and closed lower at day's end.

Crude Oil Inventories:

Giving us a sneak preview of tomorrow's much-awaited jobless claims and employment situation reports, the ADP national employment report today called for private payrolls to shrink by 473,000 in June, after an estimate of 485,000 in May. Again, not great, but improving.

ADP Payroll Expectations:

Even the beat-up and bloodied auto sector showed signs of life last month compared to June 2008 after a year of sickening slides. Declines slowed last month for four of the six major carmakers, with Ford reporting the smallest monthly drop in a year, 10.7%. (The bad news was that every major automaker except Honda reported lower sales than in May.) Even Chrysler, which emerged from bankruptcy protection last month, saw its year-over-year sales decline shrink, leading to the surmise that the industry slump that began with $4 per gallon gasoline last summer could be leveling off.

Ford is the sole U.S. automaker to avoid bankruptcy protection and the only one not receiving government loans to keep from running out of money. Anticipating increased traffic at dealers and higher sales later this year, Ford announced earlier this week that it would boost its third-quarter production by 25,000 vehicles: a bold move. The market sold on the news but the rumor, so to speak, has bumped Ford's stock price up over 240% since early March:

Ford Motor Co.:

And in end-of-an-era news, GM plans to sell or close Pontiac, Saturn, Hummer and Saab to focus on Chevrolet, Cadillac, GMC and Buick, its four core brands.

All in all, the economic news, while nothing to jump up and down about, does suggest that the recession probably won't get much worse and may even be sliding to a halt, although it was still tentative enough to put the kibosh on the market's morning rally. Four of today's most important reports came out at 10 a.m. and the major indexes took an almost immediate tumble, as this mid-afternoon illustration of the Dow shows us. The intraday charts of the S&P500 and the Nasdaq looked similar:

Dow Jones Intraday:

The Dow traded as high as 8580.47, up over 130 points from Tuesday's close, but thought better of it and settled at 8504.06, barely scraping above its 200-day moving average and still hiding below its 20-day average. The trend seems to be flattening.

Dow Jones Industrial Average:

Ditto the S&P500, who also managed just a fractional gain after a big start today and whose trend looks similar:


The Nasdaq composite eked out a gain, while still managing to keep its distinct uptrend:

The Nasdaq Composite:

For a little more reassurance, I found a chart of the NYSE Advance-Decline line. As every child of six knows, never rely a single technical indicator, and the advance-decline certainly needs other technicals to back it up. Still, this weekly chart of the last year's advance-decline shows a marked uptrend for almost three months, with higher highs and higher lows, until just recently. Are we out of the woods?

NYSE Advance-Decline Line(Weekly):

Oil was in the news today, as big pension funds that model their portfolios on popular indexes have vastly increased their purchases of crude in recent months, more than 30% since the end of last year. This has probably contributed to the doubling in oil prices this year, making our ever-reactive policy makers wonder whether some investments in commodities should be watched, if not actively curbed. Last week a Senate investigations panel released a 247-page report saying index traders have made large purchases on the Chicago wheat-futures market and have pushed up futures prices over the past few years. Really?

This week a bill was introduced that would authorize the prohibition of "excessive speculation." We'll see where it goes. The move to rein in financial investment in commodities became frantic last year as energy and food costs spiked. Naturally, as prices fell in the second half, the momentum faded fast. This kind of behavior could be why alternative energy probably won't be the holy grail so many people thought it would be, at least not in our lifetimes: Whenever oil prices get out of hand, they're likely to plummet just as quickly, taking with them any sense of urgency about energy supplies.

Even so, oil prices fell despite the decline in crude supply, on doubts about whether people and businesses will be using much more energy any time soon. Benchmark crude for August delivery fell 58 cents to settle at $69.31 a barrel with one trading day, probably a short one, left in the week.

Crude Oil:

In specific stocks, auto parts supplier Lear Corp. (LEA) tumbled after the company said it planned to restructure its U.S. operations in bankruptcy court. Genetic-instrumentation maker Illumina (ILMN) had a breathtaking skid of $7.56 or almost 20%. A decline in its genetic testing equipment business lowered its quarterly estimate to $161 million, down from its previous forecast of $168 million to $173 million. The punishment seemed awfully excessive for the crime, but we should be used to that on Wall Street.

Lear Corp.:

Announcing earnings today, wine and spirits giant Constellation Brands (STZ) gapped up and stayed up despite a big earnings skid, from 20 cents a share in last year's quarter to three cents this year; it still beat expectations even though the strong dollar took about 15% off sales. Constellation, the world's biggest wine company by volume, said it's actually benefiting as consumers switch from higher-priced beverages to bargains in every price range (my wine snob friends will faint when they read this). Shares jumped 93 cents, or 7.3%, to close at $13.61.

Constellation Brands:

Also gapping up and really on a tear is General Mills (GIS), up $2.23 or almost 4% on higher than expected earnings in the fourth quarter, on top of which it boosted its 2010 earnings estimates. Food stocks rarely let you down for very long.

General Mills Corp.:

Another winner was specialty vehicle maker Oshkosh Corp. (OSK), who gained 26%. The military said this company was the "clear winner" in a multibillion-dollar competition to build new blast resistant, off-road vehicles for ground forces in Afghanistan.

Oshkosh Corp.:

In more bad earnings news, Myriad Genetics (MYGN), who makes diagnostic and therapeutic products, missed on earnings and forecast worse than expected full year revenue. As people lose their jobs they lose their insurance, and that hurts many such equipment makers. The stock lost a stunning $9.35 or 26%.

Myriad Genetics:

Tomorrow's a big day, with reports on jobless claims, the employment situation, the European Central Bank's monetary policy and the EIA's natural gas report, as well as a number of Treasury auctions.

Tomorrow's earnings reports include Methode Electronics, MSCI, Inc., Acuity Brands and MSC Industrial Direct, among others.

And finally, last week's Federal Reserve meeting obviouly had a mild effect on the market. But it's important to keep in mind that owing to a combination of several resignations and upcoming re-appointments, a few expired terms, the ordinary appointments and the fact that Mercury is in retrograde, as a reader kindly pointed out, Barack Obama has an extraordinary, some might say alarming, chance to reshape the FOMC.

Late last year the Washington Post said, "In January 2010, Obama can either reappoint or replace Chairman Ben S. Bernanke when his term expires and make the same decision about Vice Chairman Donald L. Kohn when his term ends in June of that year. Fed governors serve a 14-year term, though in practice most leave after a few years. Thus within 18 months of taking office, Obama is likely to have appointed five of the seven Fed governors."

The central bank is supposed to be independent from politics (uh huh), so a president's best chance of influencing how the Fed will regulate banks or respond to economic changes is through these appointments. With Republicans in Congress grilling Bernanke over his possible role in strong-arming Bank of America into buying Merrill Lynch, it would seem that he's ripe for replacing. On the other hand, it might be hard for the President to find another Fed chairman so exquisitely attuned to his wishes. Ladies and gentlemen, place your bets.

Because Friday is a market holiday there will be no newsletter on Thursday night. The activity for Thursday and Friday will be covered in the weekend newsletter.

Judy Alster