Here’s Why Stocks Sparked a Turnaround

Economic reports brought enough good news to save stocks from having a horrible day.

The stock market was off to a bearish start in the morning on Thursday as investors reacted to news that the economic slowdown in China brought the HSBC Flash Manufacturing PMI into the range of contraction. Beyond that, the Japanese stock market took a severe nosedive as soaring government bond yields scared investors.

The S&P 500 (NYSEARCA:SPY) dropped as low as 1,635 before upbeat economic data facilitated a mood of bargain hunting. Stocks lost their momentum between 1:00 p.m. and 2:00 p.m. as the flow of better-than-expected economic reports probably scared investors into thinking that quantitative easing could end sooner than expected. By the closing bell, the Dow Jones Industrial Average (NYSEARCA:DIA) was just 12 points below Wednesday’s closing level.

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The day’s most important economic surprise came from the U.S. Department of Commerce’s report on April New Home Sales, which reached a seasonally adjusted annual rate of 454,000 — beating expectations of 425,000. Because the rate of new home sales is considered the best leading indicator of economic health, this upside surprise will likely shape economists’ forecasts concerning the pace of the recovery.

The Dow lost 12 points to finish Thursday’s trading session at 15,294 for a 0.08-percent decline. The S&P 500 finished Thursday’s session with a 0.29-percent drop to close at 1,650. The Nasdaq 100 (NASDAQ:QQQ) fell 0.26 percent to 2,991. The Russell 2000 (NYSEARCA:IWM) advanced 0.21 percent to 984. In other major markets, oil (NYSEARCA:USO) rose 0.24 percent to close at $33.54.

On London’s ICE Futures Europe Exchange, July futures for Brent crude oil advanced by 6 cents, or 0.06 percent, to $102.66/bbl. (NYSEARCA:BNO). June gold futures declined by $1.40, or 0.10 percent, to $1,390.40 per ounce (NYSEARCA:GLD). Transports made it into first gear on Thursday, with the Dow Jones Transportation Index (NYSEARCA:IYT) advancing 0.12 percent.

In Japan, stocks sank after the nation’s ten-year bond yield reached 0.88 percent. Although that might not sound like much, it is almost three times as high as the 0.315 percent yield on April 5. During the last three hours of Thursday’s trading session, the Nikkei 225 Stock Average took a 7.32 percent nosedive to 14,483 (NYSEARCA:EWJ).

In China, stocks sank after the HSBC Flash Manufacturing PMI report for May fell into contractionary territory at 49.6 (a seven-month low) from 50.4 in April. Economists were expecting the reading to hold at 50.4. The Shanghai Composite Index sank 1.13 percent to 2,275 (NYSEARCA:FXI). Hong Kong’s Hang Seng Index took a 2.54 percent nosedive to 22,669 (NYSEARCA:EWH).

European stocks struggled on Thursday after the Markit Flash Eurozone PMI Composite Output Index for May rose to a “less bad” 47.7 from 46.9 in April. Although the index reached a three-month high, it remained well within the zone of contraction (below 50). The bad news from Japan and China helped dampen investors’ optimism about the global economy. The Euro STOXX 50 Index finished Thursday’s trading session with a 2.05 percent drop to 2,776 – remaining above its 50-day moving average of 2,695 (NYSEARCA:FEZ).

Technical indicators reveal that the S&P 500 remains far above its 50-day moving average of 1,590 after closing at 1,650 — as bears continue to hope that we are watching the formation of a head-and-shoulders pattern, which would signal a further decline. Its Relative Strength Index fell from 64.64 to 62.10 — dropping further below the threshold level of 70, which most investors consider an “overbought” signal.

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Although both the MACD and the signal line continue soaring above the zero line (suggesting the likelihood of a further advance) the MACD has assumed a downward trajectory and is now at the signal line. If the MACD crosses below the signal line, that would suggest the likelihood of a further decline.

For the day, most sectors were negative, except for the materials and energy sectors, both of which advanced by 0.05 percent. The utilities sector took the hardest hit, falling 0.68 percent.

Consumer Discretionary (NYSEARCA:XLY): -0.21 percent

Technology (NYSEARCA:XLK): -0.03 percent

Industrials (NYSEARCA:XLI): -0.27 percent

Materials (NYSEARCA:XLB): +0.05 percent

Energy (NYSEARCA:XLE): +0.05 percent

Financials (NYSEARCA:XLF): -0.61 percent

Utilities (NYSEARCA:XLU): -0.68 percent

Health Care (NYSEARCA:XLV): -0.04 percent

Consumer Staples (NYSEARCA:XLP): -0.41 percent

Bottom line: A batch of better-than-expected economic reports saved the major stock indices from spilling more red ink after the shocking sell-off in Japan and the downbeat PMI report from China got the day off to a dismal start.

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

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