Investors Get A “Chill Pill” From FOMC's Lockhart

Stocks were off to a good start on Monday, after the Institute for Supply Management’s Manufacturing PMI for May fell to 49.0 – for its lowest reading since May of 2009. Although the May Manufacturing PMI reading from Markit Economics increased to 52.3, it was a modest increase from the six-month low of 52.1 in April. The news comforted investors, who had been worried that stronger economic data would encourage the Federal Reserve to cut back on its bond-buying program. If that were not enough, Atlanta Federal Reserve President (and FOMC member) Dennis Lockhart spoke out on Monday to assure the public that the Fed is committed to a “high level of accommodation” and that no changes to quantitative easing were likely to be considered until late in the third quarter. Lockhart specifically cited the ISM report as a good example of the data which suggest that the economy lacks sufficient resilience for any reductions in quantitative easing at the present time.

The Dow Jones Industrial Average (DIA) jumped 138 points to finish Monday’s trading session at 15,254 for a 0.92 percent surge. The S&P 500 (SPY) finished Monday’s session with a less-dramatic, 0.59 percent advance to close at 1,640.

The Nasdaq 100 (QQQ) rose by 0.30 percent to close at 2,990. The Russell 2000 (IWM) climbed 0.65 percent to 990.

In other major markets, oil (USO) jumped 1.69 percent to close at $33.16.

On London’s ICE Futures Europe Exchange, July futures for Brent crude oil advanced by $1.78 (1.77 percent) to $102.17/bbl. (BNO).

June gold futures advanced by $1.10 (0.082 percent) to $1,412.80 per ounce (GLD).

Transports were still in reverse on Monday, with the Dow Jones Transportation Index (IYT) declining by 0.05 percent.

European stocks remained in the red on Monday as Mother Nature dealt a cruel hand to the Eurozone, causing widespread flooding in Germany and elsewhere (VGK). The flooding washed away any enthusiasm which could have resulted from the “less bad” final report on Eurozone Manufacturing PMI for May from Markit Economics. Eurozone Manufacturing PMI rose to 48.3 from April’s 46.7 while beating the flash estimate of 47.8. A reading below 50 indicates contraction.

The Euro STOXX 50 Index finished Monday’s trading session with a 0.79 percent decline to 2,747 – remaining above its 50-day moving average of 2,707. Its Relative Strength Index is 46.97 (FEZ).

The Japanese stock market sank as the yen continued to strengthen. After the closing bell in Tokyo, the yen strengthened as much as 99 per dollar before weakening somewhat. A stronger yen causes Japanese exports to be less competitively priced in foreign markets (NYSEARCA:FXY). The Nikkei 225 Stock Average took a 3.72 percent nosedive to 13,261 on volume which was slightly thinner than usual (NYSEARCA:EWJ).

In China, stocks declined after the official government PMI for small businesses dropped to 47.3 in May, despite the fact that overall PMI made a better-than-expected increase to 50.8. Nevertheless official PMI for the non-manufacturing sector fell to 54.3 from April’s 54.5. The HSBC China Manufacturing PMI for May declined into contractionary territory, hitting 49.2 from April’s 50.4. The Shanghai Composite Index declined 0.06 percent to 2,299 (FXI). Hong Kong’s Hang Seng Index fell 0.49 percent to 22,282 (EWH).

Technical indicators reveal that the S&P 500 remains above its 50-day moving average of 1,601 after closing at 1,640 – as bears hope that we could be watching the formation of a head-and-shoulders pattern, which would signal a decline. Its Relative Strength Index rose from 50.05 to 53.67. Although both the MACD and the signal line remain well above the zero line (which usually suggests the likelihood of a further advance) both have assumed downward trajectories with the MACD back below the signal line, suggesting the likelihood of a decline.

For the day, all sectors were solidly positive, as the utilities and financial sectors trailed the group with gains of 0.21 percent and 0.10 percent, respectively. The consumer staples sector led the group with a 1.10 percent surge.

Consumer Discretionary (XLY): +0.45%

Technology: (XLK): +0.51%

Industrials (XLI): +0.48%

Materials: (XLB): +0.50%

Energy (XLE): +0.97%

Financials: (XLF): +0.10%

Utilities (XLU): +0.21%

Health Care: (XLV): +0.54%

Consumer Staples (XLP): +1.10%

Bottom line: On Monday, weak economic data and reassurance from FOMC member Dennis Lockhart assured investors that quantitative easing would continue, causing the major stock indices to advance.

Disclaimer: The content included herein is for educational and informational purposes only, and readers agree to Wall Street Sector Selector's Disclaimer, Terms of Use, and Privacy Policy before accessing or using this or any other publication by Wall Street Sector Selector or Ridgeline Media Group, LLC.