Market Analysis

Beyond the Number

Overbought Markets May Show Caution
8/26/2014 9:21 AM

The major U.S. index futures are pointing to a higher opening on Tuesday, with sentiment receiving a small lift following the strong headline number of the durable goods orders report. That said, the inner details of the report were not very enthusing, with much of the boost coming from the volatile commercial airplane orders. The focus may also rest on a consumer confidence reading due after the markets open and the developments in Minsk, where Russian and Ukrainian leaders are set to meet along with EU officials. The recent strong gains expose the markets to the risk of profit taking unless the catalysts are strongly positive to sustain momentum.

U.S. stocks advanced on Monday amid a flurry of deal news and hopes of stimulus support. The major averages opened higher and advanced steadily until late morning trading. After giving back some of its gains until the mid-session, the averages moved sideways before closing moderately higher.

The Dow Industrials ended up 75.65 points or 0.44 percent at 17,077, the S&P 500 Index added 9.52 points or 0.48 percent before closing at 1,998 and the Nasdaq Composite closed 18.80 points or 0.41 percent higher at 4,557. The S&P 500 Index climbed above the psychological barrier of 2,000 level for the first time ever before settling at a fresh record closing high and the Nasdaq Composite set a fresh 14-year closing high.

Twenty-four of the thirty Dow components closed higher, with JP Morgan Chase (JPM), Goldman Sachs (GS), Verizon (VZ) and Merck (MRK) leading the gains.

Biotechnology stocks rallied strongly amid the Roche-InterMune (ITMN) deal, while energy and financial stocks also gained ground. On the other hand, gold stocks retreated.

On the economic front, the Commerce Department reported that new home sales fell 2.4 percent month-over-month to a seasonally adjusted annual rate of 412,000 units. The previous month’s reading was revised upwards to 422,000 from 406,000. New home sales rose only in the South and the median price of a new home up 2.9 percent year-over-year to $269,800, but was down from June’s $280,100. Inventories

Markit’s preliminary survey showed that its service sector purchasing managers’ index unexpectedly fell to 58.5 in August from 61 in July.

Commodity, Currency Markets

Crude oil futures are rising $0.17 to $93.52 a barrel after receding $0.30 to $93.35 a barrel on Monday. Meanwhile, gold futures are climbing $3.90 to $1,282.80 an ounce. On Monday, gold added $0.50 to $1,278.90 an ounce.

Among currencies, the U.S. dollar is trading at 103.87 yen compared to the 104.05 yen it fetched at the close of New York trading on Monday. Against the euro, the dollar is trading at $1.3203 compared to yesterday’s $1.3192.


Most Asian markets retreated ahead of a meeting between Russian President Vladimir Putin and Ukrainian President Petro Poroshenko in Minsk. The rebound by the domestic currencies also exerted downward pressure on export stocks of the region. However, the New Zealand and South Korean markets rose modestly and the Australian and Taiwanese markets ended marginally lower.

Japanese stocks were hit by a firmer yen, with the Nikkei 225 average opened slightly lower and moved roughly sideways in early trading. After a steep decline in late morning trading, the index moved roughly sideways in a broad range before closing down 92.03 points or 0.59 percent at 15,521. Export stocks moved to the downside and most other stocks also came under selling pressure, while construction, oil and some pharma and utility stocks bucked the downtrend.

Hong Kong’s Hang Seng Index ended 92.41 points or 0.37 percent lower at 25,075 and China’s Shanghai Composite Index closed at 2,207, down 22.17 points or 0.99 percent.

Meanwhile, Australia’s experienced volatility throughout the session before closing up merely 1.70 points or 0.03 percent at 5,635. Financial, telecom and healthcare stocks gained ground, while most other stocks retreated.

On the economic front, the Bank of Japan reported that its index measuring corporate services climbed 3.7 percent year-over-year in July, with the increase coming in line with estimates. On a monthly basis, corporate service prices edged up 0.2 percent.

The Conference Board reported that its leading economic indicators index for China rose 1.3 percent in July following an increase of the same magnitude in June. The coincident index was up 1.2 percent.


European stocks opened on a mixed note but have turned higher since the release of the U.S. durable goods orders report.

In corporate news, French hotel chain Accor reported a strong increase in its first half profits, helped by cost cuts. Ad firm WPP posted higher profits for the first half. Meanwhile, oil company Petrofac reported a decline in its first half profits, with the weakness stemming from profit delays. Copper miner Antofagasta’s first half profits were hurt by higher production costs and lower metal prices.

U.S. Economic Reports

Orders for U.S. durable goods surged up by a record 22.6 percent in July as Boeing signed a record number of contracts for new jets, according to government figures released.

The huge jump in July durable goods orders follows an upwardly revised increase of 2.7 percent in June, up from the 0.7 percent initially reported. Orders for autos increased 10.2 percent. However, excluding transportation, orders slumped 0.8 percent.

At 9 am ET, the results of two separate house price surveys are due. The Federal House Finance Agency’s survey is expected to show a 0.3 percent month-over-month increase in house prices in June. The S&P/Case-Shiller’s survey is expected to show a 0.1 percent monthly increase in its 20-city composite house price index, while annually, the index may have risen an unadjusted 8.4 percent. In May, the index was down 0.3 percent, although it was up an unadjusted 9.3 percent year-over-year.

The Conference Board is scheduled to release the results of its consumer confidence index for August at 10 am ET. The consensus estimate calls for a small retreat in the index to 89.5 from 90.9 in July.

In June, durable goods orders rose 1.7 percent month-over-month, with a 2.9 percent increase in machinery orders supporting the headline number. The numbers for July may be solidly supported by transportation orders, with Boeing reporting at its website that it received 324 commercial airplane orders in July compared to June’s 109.

The consumer confidence index for the U.S. rose to 90.9 in July from 86.4 in June, reaching the highest reading since October 2007. The present situations index rose 2 points and the expectations index was up by 6.3 points.

The Richmond Federal Reserve’s manufacturing index due to be released at 10 am ET is expected to rise to 8 in August from 7 in July.

The Treasury is scheduled to release the result of its auction of 2-year notes at 1 pm ET.

Stocks in Focus

Amazon (AMZN) announced a definitive deal to buy Twitch Interactive, a live video platform gamers, for $970 million in cash. The deal is expected to close in the second half of 2014.

DISH Network (DISH) said it has petitioned the FCC to deny the merger of Comcast (CMCSA) and Time Warner (TWX), citing irreparable harm to competition and consumers.

Best Buy (BBY) reported forecast-beating second quarter earnings, while its revenues missed estimates. DSW’s (DSW) and Tech Data’s (TECD) second quarter results exceeded estimates.

Comtech Telecom (CMTL) confirmed that it is exploring strategic alternatives to enhance shareholder value, including a possible merger or sale of the company.

Cimarex (XEC) said it has signed various purchase and sale agreement to sell $326 million of oil and gas assets for $242 million. The company added that it is also selling $84 million worth of non-core properties in the Mid-Continent and Gulf Coast.

Analog Devices (ADI), Bob Evans (BOBE), Aruba Networks (ARUN), Smith & Wesson (SWHC) and TiVo (TIVO) are among the companies due to release their quarterly results after the close of trading.

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