While a generally quiet trading day, equity markets took a break from their voracious rally and saw most major averages down modestly. The S&P 500 finished lower by 1.17 points (-0.1%), though the Dow Jones Industrial Average managed to eek out a gain of 12.26. Volume, while still within the expected summer range, picked up slightly with 4.0 billion shares trading hands on the S&P's. This morning's Conference Board consumer sentiment reading of 50.4 helped to hold prices down on the day as it signaled that the average American is still fairly pessimistic about the country's economic prospects. No where was this more clearly shown than in the six point drop in the Expectations component of the report, which was the largest contributor to the index's drop. This further reinforces the concerns I've expressed over the resiliency of consumer spending in coming quarters. Treasuries, much like their equity counterparts, traded mostly unchanged today and saw their yields creep up only slightly. Interestingly, the gold market appeared to be the center of today's trading action as prices for the commodity fell nearly 2.00%. Rumors of continued position liquidations likely helped to fuel the move lower, but, as I've said in previous posts, clarity on the market's ultimate direction remains elusive. Momentum indicators for gold (both long and short term) suggest that this weakness will continue for the time being, but the market has yet to test a key support level like 1,120 or 1,050. Seeing how prices behave at these levels will go a long way towards letting me know how prices are likely to play out over the next six months.
As I stated last night, I believe that some long exposure to equities in here could be a winning trade. The continued positive tone of corporate earnings coupled with an improving overall technical picture should remain sufficiently supportive for this market to move higher over the next month, despite the looming economic headwinds. To that end, I took advantage of the weakness in the Dow Jones Transportation Index today and scooped up shares of the iShares Dow Jones Transportation Average ETF near the close. With the index down nearly 1.5% on the day, this was the kind of move I was hoping for, especially in light of the sharp move higher that has been seen over the last week. This was a logical place for the index to pull back since yesterday's move coincided with the previous index high that was seen on June 21st. Needless to say, a break through this level would be a confirming bullish signal. As I see it, the risk/return profile of this trade is about even, with returns slightly better on the upside (4,750 then 4,941.72) than on the down (4,100). The ultimate success of this trade, though, lies largely with investor sentiment as volumes continue to be uninspiring. For now, the bulls are winning the battle for investors' hearts, but just how long will that last? Clearly I believe that the bull case will prevail for now.
My apologies for the relatively short post today, but today's action was so quiet that there isn't much worthwhile to say. I have no doubt that there will be a pick up in market action tomorrow as we are scheduled to get the government's report on durable goods orders for the month of June as well as the release of the Federal Reserve's Beige Book commentary. For what it's worth, I suspect that the Fed's commentary will be largely benign, though slightly skewed to the downside in keeping with the Chairman's recent Congressional testimony. And with the Chairman's perspective now well known to the markets, the net effect should be nill. Durable goods order, on the other hand, could move the markets. However, in light of all the positive commentary coming from corporate managers so far this quarter, I would be quite surprised if the durable goods number came in significantly below expectations. If it does, this would suggest that there is a meaningful disconnect between what corporations are seeing and what is actually happening in the economy. It's possible, but it doesn't seem likely in my opinion. Until tomorrow....
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