Wednesday, August 25, 2010

Markets End Losing Streak, but Are Up Only Slightly

Stocks started out in ugly fashion and got even uglier at 10:00 am when the Commerce Department announced that new home sales in July slipped to their lowest-ever level, selling at an annual rate of 276,000, down 12.4% from June and down 32.4% from July of last year. The number was the lowest ever recorded since the department began tabulating the data in the 1960s.

The media trotted out the usual commentary - just as it did trying to justify the horrific numbers in existing home sales - saying that the decline was tied to the April expiration of the government's $8,000 buyer home credit. The argument is weak, since the credit expired three months prior to the most recent recording period. May sales were awful, June's only slightly better, so the evidence seems to be pointing to widespread weakness in demand, like everything else in our stressed-out economic environment.

With prices falling as well, potential home buyers - the few that are out there - are either waiting for prices to drop further, which they most surely will, or waiting until there are some positive signs in the US economy. Either way, fewer and fewer people are diving into new or existing homes, and one can hardly blame them. Younger couples in particular may be concerned about their employment situation and don't feel an urgent need to take on massive new debt even though mortgage rates are at historic lows.

While the financial press continues to call the data "surprising," American households seem to have a better grip on what's really happening in the overall economy. At the best, it's stagnating, at the worst, we've never actually emerged from recession and are about to take another leg down.

The market's reaction to the report, along with a weak 0.3% reading on durable goods, was more salt into the wounds of already-battered bulls. The usual suspect experts were expecting durables to come in with an increase of 2.5-3.0%. As usual, they were sorely disappointed, especially since durable goods orders had fallen in the previous two months, and stripping out transportation, the numbers fell to -3.8%.

Some time around noon traders managed to piece together a soft rally which extended into the close, though there was little commitment among buyers. The gains looked more like dabbling in technology and heath care and consumer cyclical stocks, but didn't amount to much.

Dow 10,060.06, +19.61 (0.20%)
NASDAQ 2,141.54, +17.78 (0.84%)
S&P 500 1,055.33, +3.46 (0.33%)
NYSE Composite 6,696.12, +15.09 (0.23%)

Advancers galloped past declining issues, 3577-2177, though new lows exceeded new highs for the second consecutive session, 344-188. Volume was about the same as yesterday's, still in a very depressed state.

NASDAQ Volume 1,859,870,000
NYSE Volume 4,530,124,500

Oil traded lower on initial reports of US inventory builds, but managed to close the day higher, up 89 cents, to $72.52 a barrel. Gold continued its march toward new highs, gaining $7.70, to $1,239.50. Silver made its second strong advance in as many days, rocketing 65 cents to close the day at $19.02.

Today's smallish rally off nothing but bad news was probably more wishful thinking than rational investing by fund managers whose mandate requires stock purchases. It's a kind of forced buying which can turn markets around on individual days, even when the overall trend is very negative. The little bit of optimism provided probably won't last into the next session, with initial jobless claims due out at 8:30 am on Thursday. The much-anticipated revision to second quarter GDP caps off a week dominated by economic reports on Friday prior to the opening bell.

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