Bonds Lift Stocks From Oil Spill

Falling yields overshadow crude's latest rise, but Dell's miss may cause trouble on Friday.
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Thursday first seemed like a replay of Wednesday's action as bulls led a morning rally, which faded as crude oil prices reached new highs. But after crude oil prices settled for the day, buyers seized on a rally in bonds to take back the upper hand.

The

Dow Jones Industrial Average

(DJI)

finished up 91.48 points, or 0.9%, at 10,685.89, its high for the day. The blue-chip average was supported by a 3% rise in the shares of

Alcoa

(AA) - Get Report

, which was upgraded by UBS, and oil giant

Exxon Mobil

(XOM) - Get Report

, which rose 1.8%.

The

S&P 500

(SPX)

rose 8.68 points, or 0.7%, to 1237.81. The

Nasdaq Composite

(NASDAQ)

added 16.74 points, or 0.8%, to 2174.55 despite weakness in

Intel

(INTC) - Get Report

, which fell to as low as $26.36 after a Goldman Sachs downgrade before recovering to close off 0.2% to $26.82. (Intel dipped again after hours, however, following a

disappointing top-line results from

Dell

(DELL) - Get Report

, which was recently down 7.7% in after-hours trading.)

The day's gain was a surprising show of bullish will, as crude oil for September delivery still closed up 90 cents to another record high of $65.80 on Nymex. It briefly traded above $66 during the session.

Earnings from

Target

(TGT) - Get Report

showed that higher oil prices aren't cutting into consumer spending, and helped equity investors forget that July retail sales came in weaker than expected.

The weak retail sales also contributed to a rally in Treasuries -- and corresponding slide in yields -- further fueling bullish sentiment for stocks. The weak sales boosted confidence that the economy remains free of inflationary pressures. Surging oil prices are seen as a further tax on growth.

All these factors helped contribute to a slide in the dollar against the euro, which in turn led gold to surge 2% to an eight-month high. The Philadelphia Stock Exchange Gold and Silver Index rose 4.1%.

The bond rally accelerated in afternoon trade as an auction of 10-year notes saw a large increase in the buying interest of indirect bidders -- i.e., foreign central banks and offshore hedge funds. Concerns ran high earlier this year that foreign purchases of Treasury bonds would continue dwindling, lifting interest rates.

The benchmark 10-year Treasury bond rose 17/32 and its yield fell to 4.33%.

Lower bond yields helped stocks remain attractive, even as oil prices continued to rise. Still, market players seem unwilling to take the major averages convincingly higher or lower.

According to Eliot Spar, market strategist at Ryan Beck & Co., the S&P 500 is stuck in a range of 1225 to 1250, and it may take a couple of days of back and forth for the index to convincingly break through either on the up or the downside.

His best guess is that the odds remain tilted for the latter. "We have gone so far from the April lows without a meaningful correction," he says.

While many have been expecting the market to start pulling back for some time now, bullish sentiment has been fueled by a spate of positive economic data, including the second-quarter GDP and July employment.

And when the

Federal Reserve

didn't ring the alarm bells on inflation after delivering its 10th straight rate hike on Tuesday, that served as a further catalyst for gains.

Likewise, the market took weak July retail sales as a positive for inflation.

Goldilocks Goes Back to School

Retail sales rose 1.8% in July, below Wall Street economists' forecasts for sales to rise 2.2%. The headline numbers masked even further weakness. Excluding automobile, retail sales were up a paltry 0.3%, and a large part of that gain came from gasoline sales, which rose not because of strong demand but because of higher prices.

Gasoline prices are not counted as part of core inflation but auto prices, which automakers have been slashing with incentives, are. "That's going to put a big damper on the July

consumer price index next week," says Michael Gregory, interest rate strategist at BMO Nesbitt Burns.

So far, the stock market is so far under the impression that a so-called Goldilocks economy, where economic vigor is not accompanied by inflation, supports further gains in stock prices.

But what should be made of the weak signals from the consumer just as oil prices are again surging to new highs?

Some say that retail sales will make a big comeback in August and September, the back-to-school sales season. But others are drawing different conclusions.

"The consumer is stretched out," says Asha Bangalore, an economist at Northern Trust, who has been bearish on the economy for a while.

Besides surging oil gasoline prices, interest rates are starting to rise and house-price appreciation, which has been used to finance consumption, is starting to flatten out.

A stronger economic outlook has been bolstered by a correction in the inventory buildup seen in the first quarter, she says. On Thursday, the Commerce Department said that total business inventories were unchanged in June, marking the first time in nine months that inventories didn't rise.

The inventory drawdown, largely led by the automobile industry's use of sales incentives, should help boost growth through the third quarter, Bangalore says. "But by the fourth quarter, slowing economic conditions will even be evident in the GDP," she says.

That may be a bit too far in the future to unnerve a very short-term focused stock market. But if a catalyst to an August correction is to be found, the short version is this: Crude oil is trading at $65 per barrel.

To view Gregg Greenberg's video take on today's market, click here

.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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