Uptrend in stocks resumes with Dow climbing some 150 points

The Dow Jones Industrials and S&P 500 shrugged off two days of decline and rebounded strongly on Wednesday. Recouping more than half of their Monday-Tuesday declines, the Dow (69%) increased 154 points or 0.9% and the S&P 500 (56%) added 0.8%. The NASDAQ Composite jumped 1.0%, aided by big gains in some of the social media and biotech stocks that hurt performance the first two days of the week. Stock prices were modestly lower at the open but turned decisively higher at 10:00 EDT following the best new home sales report in more than six years.

Big-cap stocks are demonstrating an impressive upwards persistence. After Wednesday’s gains, the Dow, S&P 500 and NASDAQ indexes are all within 1% of their highs – all-time highs in the case of the Dow and S&P 500, 14-year highs for NASDAQ. In contrast, the S&P 600 SmallCaps and the Russell 2000, the two principal small-cap indexes, are 6%-7% below their highs and as much as 3% under water in 2014. Still, even after Wednesday’s gains, the so-called death cross in the Russell 2000 index (1128) is still in play, as its 50-day moving average (1150) remains marginally below its 200-day moving average (1152). However much value one is willing to place in this esoteric technical indicator, small-cap stocks certainly do not show the same bullish persistence that the big caps are showing.

Health care stocks had healthy gains in the S&P 500 (+1.7%), S&P 400 MidCaps (+1.1%) and S&P 600 SmallCaps (+2.2%) on Wednesday. The health care sector got pounded on Tuesday on concerns that Treasury’s attempts to diminish the attractiveness of so-called tax inversions may reduce the M&A appeal of many of these stocks. Those concerns appear to have been overblown; at any rate, they clearly lessened on Wednesday, and health care stocks continue to boast some of the best price gains over the past 12 months. Both consumer sectors – discretionary and staples – and materials stocks saw prices rise more than 1% today, while energy stocks and utilities continue as the weak sisters among the S&P 500 sectors in the third quarter.

New home sales rose 18% in August, hitting a seasonally adjusted annual rate of 504,000, a six-year high. Adding in existing home sales, which fell 2% in August, total single-family home sales were flat last month at a 5.0 million SAAR, essentially the highest rate this year. Also in the news today, the Mortgage Bankers Association reported that mortgage applications fell 4% in the latest week to a level roughly one-third below the 2013 level (a trend that undermines to some extent the enthusiasm generated by today’s new home sales report).

Stock prices in Europe were generally higher on Wednesday as well, although not quite up to U.S. standards. The Stoxx Europe 600 index rose 0.7% today, with gains as much as 1.7% in Italy. Germany’s DAX index rose 0.7%, despite (or perhaps because of) the report that the Ifo survey of the German business climate dipped to 104.7 in September, below Street expectations and down from a reading of 106.3 in August. (Soft economic data may make ECB easing measures more likely.) Asian share prices were mixed – the Asia Dow lost 0.3% – as declines in Japan, Australia, India and Singapore offset a 1.5% rise in Shanghai.

As the new home sales report hit the wires and stock prices shot higher, bond prices reversed some early gains and went lower over the rest of the day. The yield on the 10-year Treasury note rose 4 basis points to 2.57%, and the 5-year T-note’s yield also went 4 bps higher to 1.80%. Today’s Treasury auction of $35 billion in 5-year notes was the least appealing to investors of 2014, with a bid-to-cover ratio of 2.56 (vs an average of 2.75 over the past 10 auctions) and dealers left with upwards of 40% of the offering.

Reports/dates/facts/links to watch for over the next week:

  1. September 25: U.S. durable goods orders (August); weekly unemployment claims.
  2. September 26: Second-quarter GDP, first revision; University of Michigan consumer sentiment index (September).
  3. September 29: U.S. personal income and spending (August); pending home sales (August); Dallas Fed manufacturing survey (September); Japan industrial production (August); China Markit manufacturing PMI (September).
  4. September 30: Consumer confidence (September); Case-Shiller home price indexes (July); Chicago PMI (September).

Copyright © 2014 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.

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Senior Vice President – Investment Research/Economist
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