Market Listens to Its Inner Bull as Stocks Turn Around - TheStreet

Market Listens to Its Inner Bull as Stocks Turn Around

The economic reports weren't encouraging, but investors decided to ignore them in Tuesday's action.
Author:
Publish date:

The second half is upon us but the recovery remains elusive, at least on the economic front. On Wall Street, however, the "show me" period for the economy's recovery is not yet upon us, judging by Tuesday's action. Shares initially declined in reaction to a string of desultory economic reports, but rebounded smartly in the afternoon.

The day's economic highlight (lowlight, actually) was the 10 a.m. EDT release of the Institute for Supply Management's survey for June. At 49.8, the national manufacturing index was up modestly from May's 49.4, but below the expansion/contraction demarcation at 50 for the fourth-straight month and well off expectations for an increase to 51. Major averages hit session lows shortly after the ISM release, but bounced soon thereafter.

After trading as low as 8871.20, the

Dow Jones Industrial Average

recovered steadily through midday, then picked up steam in the afternoon to finish up 0.6% to 9040.95. Following similar patterns, the

S&P 500

rose 0.8% to 982.31, avoiding a break of the closely watched

973 level after trading as low as 962.10 early on. Meanwhile, the

Nasdaq Composite

gained 1.1% to 1640.06 after trading as low as 1598.92.

The guts of the ISM provided some impetus for the rebound. The weaker-than-expected headline number was due largely to the inventories component, which fell to 41.3 from 46.1 in May. Lean inventories reflect businesses' ongoing caution about spending.

The more optimistic analysis, which apparently held sway Tuesday, is that lean inventories will necessitate a ramp-up in production if and when demand revives. Hopes for such a scenario were encouraged by the pickup in both the new orders and production components for the second-straight month. Finally, the 46.2 reading on employment was the strongest since January, albeit still weak on an absolute basis.

"On the whole, the measured improvement in manufacturing is consistent with the gradual gains visible in final demand in recent months," commented Peter Kretzmer, senior economist at Bank of America.

Earlier, the government reported May construction spending unexpectedly fell 1.7% vs. consensus expectations for a 0.3% gain. Also, April's decline was revised to 0.6% from 0.3% originally. The bullish spin was that April's heavy rains were responsible for the unexpected decline. Whether construction spending flowered in May remains to be seen, but "better weather should translate into more spending on buildings over the months ahead," forecast Gina Martin, economist at Wachovia Group.

In concert with the stock market's post-ISM rally, the Treasury market rescinded its initial gains. The price of the benchmark 10-year note fell 11/32 to 100 18/32, its yield rising to 3.55%.

Some traders said Treasuries' failed rally prompted asset allocators to flip into equities, aiding the stock market's recovery. Others pointed to buying in anticipation of inflows after the mainstream media's gushing over the market's second-quarter rally.

Finally,

Wall Street was emboldened after U.S. District Judge Milton Pollack threw out a class-action lawsuit against

Merrill Lynch

(MER)

. Investors suing Merrill over its bubble-era research were "high-risk" speculators trying to blame the brokerage firm for their own "rash speculation," Pollack declared. Merrill rose 2.3% while

Citigroup

(C) - Get Report

gained 2%. The Amex Broker/Dealer Index climbed 1.6% while the Philadelphia Stock Exchange/KBW Bank Index rose 1.3%.

More Bad News to Shake Off

Unlike the aforementioned economic reports, there was less room for positive spin on the June auto and light truck sales, which were estimated at between 16 million and 16.3 million units on a seasonally adjusted basis. That's flat vs. a year-ago levels despite heavy sales incentives.

Ford

(F) - Get Report

sales fell 7.7% last month vs. a 6.7% decline forecast by Goldman Sachs.

General Motors

(GM) - Get Report

reported a 1.5% gain last month but that was below estimates for a gain in the 4% to 5% range, according to StreetAccount.com. Ford shares fell 1.8% and GM lost 0.9%.

Foreign automakers fared better.

DaimlerChrysler

(DCX)

, for instance, reported a 6% gain for its Chrysler unit and a 6.7% gain for its Mercedes-Benz division.

Toyota Motor

(TM) - Get Report

said sales of its Toyota and Lexus divisions rose a combined 11% in June. DaimlerChrysler shares dipped 0.2% and Toyota rose 0.8%.

In addition to the (mainly) disappointing economic news, shares also overcame some cautious comments from

Microsoft

(MSFT) - Get Report

founder and chief software architect Bill Gates, and analysts' downgrades of

Boeing

(BA) - Get Report

(by Deutsche Bank),

SAP

(SAP) - Get Report

(by J.P. Morgan) and

Cheesecake Factory

(CAKE) - Get Report

(by Smith Barney).

After trading as low as $33.90, Dow component Boeing recovered to close up 1% to $34.67 while SAP dipped 1.5% and Cheescake Factory shed 5.1%. (On the flip side,

Starbucks

(SBUX) - Get Report

rose 3.7% thanks to an upgrade from Smith Barney; the caffeine peddler reported a 27% year-over-year gain in revenues and a 10% increase in same-store sales for the five weeks ended June 39.)

In an

interview with

USA Today

, Gates said (among other things):

"... Capital spending on information technology gear is unlikely in my lifetime to ever achieve the levels that it saw in the late '90s. Anybody who's got a business plan where they're holding their breath until those days return is likely to die of asphyxiation."

"And so, although we have a few customers that are increasing their IT budget and some that are decreasing, on balance, we just assume that IT spending won't be all that different than it is today."

"I wouldn't say I see any sort of substantial upturn at this stage, no."

Whatever negative effects of Gates' cautiousness, the impact on shares was short-lived -- same as with the economic data.

The moral of Tuesday's story is the stock market continues to show resilience to negative news and some traders remain ready, willing and able to buy intraday dips, albeit with less gusto than a few weeks ago. Furthermore, volume increased as the afternoon rally unfolded, although overall volume was relatively modest. About 1.3 billion shares were traded on the

Big Board

and 1.6 billion in over-the-counter activity.

Volume is expected to dry up further as the July Fourth holiday weekend approaches. Low volume contributes to volatility but also allows traders' true emotions to reveal themselves, as was the case Tuesday.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.