Believe it or not, the primary catalyst behind the big up day for stocks was some decent economic data here in the U.S. as an unexpected jump in consumer spending in July helped lift the S&P 500 to a gain of nearly 3%. The Nasdaq surged by more than 3% while the Dow Jones Industrial Average tacked on nearly 255 points for a jump of almost 2.3%. The Russell 2000 surged nearly 4%.
No doubt, the consumer spending data was a pleasant surprise. The Commerce Department reported showed consumer spending climbed 0.8% in July and the June reading was revised upward to a drop of just 0.1% compared with the previous reading of 0.2%. Economists had been expecting a July increase of half a percent.
July's consumer spending data was good enough to prompt some positive revisions to GDP growth projections by some analysts. While the second-quarter GDP number was nothing short of anemic, Capital Economics said July's consumer spending data could lead to full-year GDP growth of 2.5%. Not amazing, but better than the 1.5%-2% many banks and economists have been forecasting.
Real personal consumer expenditures increased by half a percent in July compared with the 0.1% drop seen in June while personal income climbed 0.3% to $42.3 billion. The June personal income reading was also revised up to an increase of 0.2% from the previous reading of 0.1%. All this means consumers are saving less as the savings rate as a percentage of disposable income fell 5% last month.
There was some economic news that was not so good. The National Association of Realtors said pending home sales declined 1.3% last month. Contracts signed to purchase previously owned homes fell to 89.7 from 90.9 in June, indicating low mortgage rates and foreclosure prices have not been enough to get home buyers off the sidelines.
Personal Expenditures And Income Chart
Post-Jackson Hole, positivity permeated the market today as just three S&P 500 constituents closed in the red and all 10 industry groups traded higher. While there may have been some initial disappointment on Friday to Federal Reserve Chairman Ben Bernanke not announcing a third round of quantitative easing, a couple of things on that front are worth remembering. First, Bernanke was clear to remind investors that the Fed still has tools as its disposal to jolt the economy if necessary. Second, if QE3 is not announced in the near-term, perhaps that signals the Fed is bullish in its outlook for economic growth. Today's economic data would underscore that view.
Keeping with the positivity theme, Monday was a stellar day for insurance stocks. According to Bloomberg News, last week, Kinetic Analysis Corp. estimated that the total loss to insurance providers related to Hurricane Irene could be as much as $14 billion. That estimate was slashed to $2.6 billion today, sparking a rally in almost every major insurance stock. Rather than run through each of them individually, I have included a chart of the SPDR KBW Insurance ETF (KIE), which gained nearly 6% on volume that was almost twice the daily average. Total economic losses, including those that are not insured, may be about $7 billion, Bloomberg reported.
Insurance ETF Chart
Bank of America (BAC), the Dow component and largest U.S. bank by assets, enjoyed another solid day and this time, it had nothing to do with Warren Buffett. Shares of BofA gained more than 8% on volume that was well above the daily average after the bank announced it will sell half its stake in China Construction Bank to a group of unidentified investors in a transaction worth about $8.3 billion.
This is just the latest in a number of asset sales that BofA has engaged in an almost desperate attempt to assuage investors that it does have sufficient capital. Bruce Thompson, BofA's CFO, said the deal to sell half of its China Construction stake will boost its Tier 1 capital reserves by $3.5 billion and reduce its risk-weighted assets by $7.3 billion under the Basel I rules, the New York Times reported.
All told, BofA will be parting with about 13.1 billion shares of China Construction, more than likely to sovereign wealth funds in Asia and the Middle East. Even the after that massive share dump, BofA will still own 5% of China Construction, the Times reported. The transaction is slated to close later this quarter.
Bank Of America Chart
And from the category of ''can you believe it,'' one of the biggest gainers on any major U.S. exchange today were the U.S.-listed shares of National Bank of Greece (NBG). Admittedly, by price tag this is a penny stock, but a 38% gain on almost triple the average daily volume for any stock with ties to Greece is noteworthy these days.
Still suffocating from the grip of an epic financial crisis, Greek stocks got some good news today when Eurobank and Alpha Bank, the country's second- and third-largest banks respectively, agreed to merge in a deal that will make the combined bank larger than NBG. The merger creates a bank with almost $212 billion in assets. NBG tried to acquire Alpha earlier this year, but the latter dismissed the offer as too low.
A bank with $212 billion in assets is a big bank, especially by the standards of Greece, but to put things in perspective, Greece has received $315 billion in bailout funds over the past two years, according to the Associated Press.
National Bank of Greece Chart
Looking at the charts, I do not want to go out on a limb and say we are suddenly in the throes of a legitimate bullish rally, but Monday's action does add to that case. Resistance for the S&P 500 looked strong at 1205, but that level was taken out today. Now the test becomes the ability of 1200 to hold as support. If not, a firmer floor is found at 1175. On the upside, the S&P 500 now has a lot of room to work with before encountering next resistance in the 1245-1250 area.
S&P 500 Chart
Twenty-nine of the Dow's 30 members managed to close in the green today with Home Depot (HD) the lone laggard. On an individual basis, Monday's surge for TRV was probably a one-off event and BAC is still beholden to substantial headline risk, but there is some good news as well. Oil bears have been unable to force West Texas Intermediate below $80 and every positive economic data point is good for oil prices. In turn, that is good for CVX and XOM.
Fund managers looking for safety and dividends could also drive the Dow higher in the coming days. Monday's close above 11,500 could prove to be a bullish sign as that was some solid resistance. Support should be old resistance at 11,325.
The Nasdaq was able to take out its August high at 2555 today while smashing through resistance at 2480. Now the index has a clear runway for another 75-100 points. The Nasdaq's bullish tell would be the 2550 zone turning into support. If not, a pullback could mean a retreat to 2480. A source of encouragement for tech bulls could be strong charts for AAPL, AMZN and PCLN.
The Russell 2000 was a stout performer today and a couple more days of this type of action and it might be safe to say money managers are embracing risk again. Resistance at 700 was did not prove to be much of a hurdle at all and the Russell 2000 looks it could make a run back to the 750 area where it would start to encounter more congestion. From a psychological standpoint, it would be a positive to see the Russell remain above 700.
Russell 2000 Chart
Monday's trade was significant in that there was a legitimate catalyst in the form of some surprisingly strong economic data and that is important because this week is chock full of economic data points with the big ones being ISM, the ADP jobs report and then the August non-farm payroll number on Friday. Since we are heading into a holiday weekend, this is the perfect opportunity for buyers to take advantage of absent sellers and tack on some light volume gains. Encouraging economic data provides the perfect excuse to do some buying now with the expectation of a rally into year end.