by Sam Collins 06/25/08
Stock prices bounced around a bit yesterday, but by the closing bell most traders called it quits with slight losses. There was a lot of talk about a new plan to stem inflation that will come from the Fed today, but there is no solid evidence it will happen.
However with the Fed caught between the need to encourage growth and the requirement to do what is necessary to keep inflation under control, investors find it difficult to imagine that Fed Chairman Ben Bernanke will increase interest rates.
Tuesday's Richmond Federal Reserve manufacturing index, which fell to negative 12 in June from negative 2 in May, shows a slowdown in economic activity and a pick-up in prices. At the same time, consumer confidence in June slipped to 13% -- its lowest level in 16 years.
But worldwide inflation is picking up, so with the Fed facing a difficult decision and investors confronted with uncertainty, they sold off some stocks in anticipation of the meeting's results.
United Parcel Service (UPS) fell 6% after it slashed its Q2 outlook due to rising fuel costs and a sluggish economy. And Dow Chemical Co. (DOW) said that it will raise prices to offset the increasing costs of fuel and raw materials -- DOW fell 2.8%.
But the financial sector rose by 1.5% yesterday, after being down by 2.2%, and this created the second reversal for the group in the past four days. Wachovia (WB) rose 0.96% on news that Goldman Sachs (GS) was to "perform analytics" on its loan portfolio. UBS (UBS) rose 7% on speculation that HSBC Holdings (HBC) would make an offer to acquire it.
At the close, the Dow Jones Industrial Average (DJI) had fallen 35 points to 11,807, the S&P 500 (SPX) lost four points at 1,314 and the Nasdaq (NASD) fell to 2,368, down 17 points.
The New York Stock Exchange traded 1.3 billion shares, with decliners ahead of advancers by 2-to-1, and on the Nasdaq (NASD), nine million shares traded with decliners ahead by almost 3-to-1.
Crude oil prices closed higher yesterday but well below the session's high price of $138.75 a barrel. At the close, the August contract was up 26 cents at $137. The intraday high was attributed to a possible disruption of Nigeria's production and further weakness in the dollar.
The Amex Energy SPDR (XLE) fell $1.69 to $87.45, continuing its pattern of tops. Watch the XLE since pressure is building for a dramatic breakout -- but will it break up or down? Stay tuned.
August gold prices rose $4.40 to $891.60 per troy ounce, and the PHLX Gold/Silver Index (XAU) fell to its 200-day moving average at $179.62, off 91 cents.
What the Markets Are Saying
The Dow Industrials (DJI) are just 67 points above the March closing low of 11,740. The S&P 500 (SPX) is now through the bottom of Support Zone B (1,320), just four points from its January closing low and headed for a test of its March low at 1,273, and the Nasdaq (NASD) is well into its Support Zone B (2,265 – 2,400). With all of this, it makes sense to question the market's future direction.
With each of the major indices now below their respective 50-day moving averages and with a near-term pattern of lower lows now established, it is reasonable to conclude that we will first have a test of the March lows and then the January lows. But a close under the Dow's March low of 11,740 would constitute a technical breakdown. This would result in a pick-up of volume and most likely lower prices.
Would a breakdown of the Dow necessarily pull the other indices down with it?
Most likely, the other indices would decline but the S&P 500 (SPX), the NYSE Composite (NYA) and the Nasdaq (NASD) are much farther away from their ultimate support than the Dow (DJI). So, the chance of their holding is quite good.
At worst, we could look forward to a very long summer of thrusts and parries as an extended bottom continues to develop.
Today's Trading Landscape
Earnings to be reported include: American Greetings Corp. (AM), Bed Bath & Beyond (BBB), CKE Restaurants (CKR), General Mills (GIS), Herman Miller (MLHR), Monsanto (MON), Nike (NKE), Oracle (ORCL), Red Hat (RHAT), Research In Motion (RIMM) and Xyratex Ltd. (XRTX).
The following economic reports are due today: May Durable Goods Orders (the consensus expects 0.0%, excluding transports negative 0.9%), May new home sales and weekly crude inventories.
The focus today will be on the Fed's 2:15 p.m. Eastern announcement about interest rates -- just as more evidence of global inflation hit the news today. The Dow Chemical (DOW) price increase is the second in a month to meet the increased costs of energy and could impact Fed policy since it illustrates the future of global prices.
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