Here’s How Market Optimists Won the Day

Fed rumors swirl, but optimists win as market moves higher.

Monday’s economic reports were closely scrutinized as we approach the FOMC meeting on Wednesday and Thursday, when the Fed will decide on the fate of quantitative easing. Investors who have been worried about cutbacks to the Fed’s bond-buying program experience nightmares about robust economic reports, such as Monday’s release of the homebuilder confidence index, which could convince the Fed that all is well with the economy. As a result of such a finding, the Fed could begin to wind-down its bond buying from the current $85 billion-per-month pace.

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The National Association of Home Builders reported that its Housing Market Index — also known as the “homebuilder confidence index” — increased 8 points in June to 52. It was the first time that the index had broken above 50 since April of 2006. Economists had been expecting a less-significant increase to 45 from May’s 44. On the other hand, the New York Federal Reserve’s Empire State Manufacturing Survey for June offered enough downbeat commentary to appease those fretting over the fate of quantitative easing.

Although economists had been expecting to see the general business conditions index increase to zero from May’s negative 1.4, the index soared to 7.8. Despite the wildly upbeat headline number, a close reading of the report reveals that the economic news might not be as rosy as it seems. Most of the indicators in the survey declined. The following statement from the report should allow quantitative easing fans to get some sleep tonight:

Continuing the trend seen in the past few months, indexes for the six-month outlook declined, suggesting that optimism about future conditions was weakening further. 

Because Monday’s economic reports had something for everyone, the major stock indices soared. The Dow Jones Industrial Average (NYSEARCA:DIA) jumped 109 points to finish Monday’s trading session at 15,179 for a 0.73 percent advance. The S&P 500 (NYSEARCA:SPY) climbed 0.76 percent to close at 1,639. The Nasdaq 100 (NASDAQ:QQQ) surged 0.93 percent to close at 2,971. The Russell 2000 (NYSEARCA:IWM) rose 0.65 percent to 987.

 

In other major markets, oil (NYSEARCA:USO) advanced 0.03 percent to close at $34.75. On London’s ICE Futures Europe Exchange, July futures for Brent crude oil declined by 34 cents (0.32 percent) to $105.59/bbl. (NYSEARCA:BNO). August gold futures declined by $3.20, or 0.23 percent, to $1,384.40 per ounce (NYSEARCA:GLD). Transports were out of gas on Monday, with the Dow Jones Transportation Average (NYSEARCA:IYT) declining 0.23 percent.

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A weakening yen gave Japanese stocks a big boost on Monday. The yen fell to approximately 95 per dollar during Monday’s trading session. A weaker yen causes Japanese exports to be more competitively priced in foreign markets (NYSEARCA:FXY). The Nikkei 225 Stock Average skyrocketed 2.73 percent to 13,033 (NYSEARCA:EWJ).

European stocks made big gains on Monday as the Group of 8 summit began at the Lough Eme Resort in Northern Ireland (NYSEARCA:VGK). Investors were hopeful that constructive trade agreements would help facilitate an economic recovery in the recession-plagued euro zone. The Euro STOXX 50 Index finished Monday’s session with a 1.33 percent surge to 2,702 — remaining below its 50-day moving average of 2,720. Its Relative Strength Index is 45.80 (NYSEARCA:FEZ).

In China, stocks made a slight retreat after the government enacted rules making compliance with construction guidelines a prerequisite for obtaining presale permits. The financial sector also took a hit after a report that the People’s Bank of China refused to boost funding for the interbank market because troubled banks may have circumvented lending caps. The Shanghai Composite Index declined 0.25 percent to 2,156 (NYSEARCA:FXI). Hong Kong’s Hang Seng Index jumped 1.22 percent to 21,225 as a result of new government assurances that it will facilitate financing for solar panel manufacturers (NYSEARCA:EWH).

Technical indicators reveal that the S&P 500 remained above its 50-day moving average of 1,615 after closing at 1,639. Some bears might insist that a head-and-shoulders pattern has now formed on the chart, while bulls may argue that a double-bottom occurred along the 50-day moving average on June 6th and 13th.

Nevertheless, if the S&P 500 should close below its 50-day moving average, that will not matter. A selloff would likely ensue. Its Relative Strength Index climbed from 49.04 to 52.78. The MACD remains below the signal line and both are have assumed horizontal trajectories, suggesting the likelihood of remaining at the current level.

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For the day, all sectors were solidly in positive territory, as the energy sector took the clear lead, with a 1.44 percent advance. The healthcare sector was the laggard, advancing by only 0.23 percent.

Consumer Discretionary (NYSEARCA:XLY): +0.55 percent

Technology (NYSEARCA:XLK): +0.92 percent

Industrials (NYSEARCA:XLI): +0.79 percent

Materials (NYSEARCA:XLB): +0.85 percent

Energy (NYSEARCA:XLE): +1.44 percent

Financials (NYSEARCA:XLF): +0.97 percent

Utilities (NYSEARCA:XLU): +0.32 percent

Health Care (NYSEARCA:XLV): +0.23 percent

Consumer Staples (NYSEARCA:XLP): +0.88 percent

Bottom line: Stocks made big gains on Monday as Fed rumors swirled and economic reports weren’t strong enough to encourage the FOMC to begin its cutbacks to quantitative easing at the present time.

John Nyaradi is the author of The ETF Investing Premium Newsletter.

Don’t Miss: Markets Don’t Need a Fed Statement to Know Where QE Is Headed.