Stocks Capped a Volatile Week with a Rally on Speculation the Fed will Aid the Stalling Recovery.

Published on Saturday, 28 August 2010 10:00 Written by TradersHuddle Staff

Weston, August 28^th (Tradershuddle.com) – Stocks finished a volatile week, with a rally, on speculation the Fed will step in to aid the stalling economic recovery. Economic worries and dismal housing data outweighed increased M&A activity.

For the week, the blue chip index fell 0.62%; the S&P 500 index slid 0.66% and the NASDAQ dropped 1.20%.

At the start of the week, M&A news sparked buying interest in the early trade. Hewlett-Packard (NYSE:HPQ), the largest PC maker in the world, announced a bid for 3Par (NYSE:PAR), the utility storage company, for a premium of more than 33% from a previous bid made by rival Dell (NASDAQ:DELL).

Also, news that Potash’s Board rejected BHP Billiton’s (NYSE:BHP) hostile takeover and announced possible talks with other suitors like Vale SA (NYSE:VALE), the iron ore producer based in Brazil, signaled investors that a higher bid was likely.

The market moved to gains of almost 1%; however the momentum faded after the S&P 500 reach resistance level, market participants never tried to push thru the resistance and left the market to drift in the neutral line before slipping into negative territory.

Industrials, technology, and materials were the worst performing sectors of the session. Caterpillar (NYSE:CAT), the largest maker of earthmoving equipment in the world, tumbled 2.93% to $66.93, posting the biggest percentage decline in the Dow Jones Industrial Average. Caterpillar, along with weakness in Boeing (NYSE:BA), the second largest commercial aircraft maker in the world, led the industrials to post a 1.1% loss in the session. Boeing shares fell as investors speculated on the strength of the economic recovery and as the Dollar turned higher after equities moved lower.

The strength on the greenback, which gained 0.2%, coupled with macro economic worries pushed material stocks to post a 1% loss as a group. Alcoa (NYSE:AA), the aluminum producer fell 1.89% to $10.37 on lower metal and commodity prices.

Technology shares weighed heavily on the broad market index and on the tech heavy NASDAQ that underperformed for the session. Cisco (NASDAQ:CSCO), the world’s largest maker of networking equipment, posted the second biggest percentage decline in the blue chip index, technology posted a 1% loss.

The energy sector gained 0.2%, despite lower crude oil prices. The contract for October delivery fell 1%, as early gains faded, to settle at $73.11 per barrel.

Meanwhile Treasuries gained after gains in the equity market faded as speculation mounted that the U.S. economic recovery was stalling, pushing 2-year note yields to another record low. The yield on the benchmark 10-year note fell to 2.60%.

On Tuesday, stocks fell, with the S&P 500 falling to a seven-week low, as existing home sales plunged to an all time record low, raising concern that the largest economy in the world will slip back into recession.

Selling pressure increased after a report showed existing home sales plunging to an all-time low. July existing homes sales plunged 27% month over month to an annualized rate of 3.8 million units, which was much lower than the expected 4.7 million-unit rates, this along the house supply at 12.5 months smashed any hopes of a recovery in the housing market.

The dismal housing data pushed the benchmark indices even lower, with the Dow Jones Industrial Average dipping below the 10,000-level for a brief period of time, before the market found some support and helped stocks pare some losses.

Concern over the U.S. economic health reversed the greenback, which at the end finished flat for the session, with the Yen actually setting a 15-year high against the Dollar.

Materials, industrials, healthcare, and consumer discretionary were the worst performing sectors, with investors gravitating to defensive oriented sectors like utilities and telecom, which posted some modest gains.

The healthcare sector did not fare well in the session, as weakness from medical device Medtronic (NYSE:MDT) impacted the sector. Medtronic plunged more than 10% after cutting its earnings outlook for next year as global demand for its devices slowdown.

Materials posted a 2.3% loss, as concern over the economic recovery and the plunge in home sales pushed metal prices lower. Alcoa (NYSE:AA), the aluminum producer, fell 2.99% to $10.06, helping the sector lower.

Fears that the housing debacle will push the world’s largest economy back into recession sparked a sell-off in the industrial sector. Boeing (NYSE:BA) was the worst Dow component after its shares plunged 3.74% to $60.93. And Caterpillar (NYSE:CAT) was also dragged by weakness in the industrials and materials sector. The economic jitters pushed market participants to push the stock lower 2.69% to $65.04, posting the third biggest percentage decline in the blue chip index.

Consumer discretionary stocks fell 1.7%, with Walt Disney (NYSE:DIS), the largest media company in the world dragging on the sector on economic concern. Walt Disney fell 2.40% to $32.14.

And crude oil fell below $72 per barrel as fears of that the economy will slide back into recession impacting fuel demand.

Meanwhile, Treasuries gained as investors sought the relative safety of U.S. government debt. 2-year note yields fell to another record low and yield on the benchmark 10-year note fell to 2.50%.

Mid week, stocks recovered from earlier losses, as the Dow Jones Industrial Average finished the session above 10,000. The market had been lower for much of the day before bargain hunters stepped in and shorts covered their positions after a dismal new home sales report and a disappointing durable goods report increased the odds of a sharp economic slowdown.

Before the open the Commerce Department report on Durable Goods orders added to the negative tone, as orders for July increased just 0.3%, which is far less than the 3.0% increase that had been widely expected.

Bears intensified their efforts when new home sales numbers for July tumbled 12.4% month-over-month to an annualized rate of 276,000 units, well below the expected rate of 334,000 units. The selling pressure pushed the market thru near-term support levels, but the major benchmark indices were quickly to rebound, sparking short covering that helped lift them to positive territory.

Consumer discretionary, healthcare, telecom, and technology were the best performing sectors. Home improvement retailers and homebuilders showed some of the most impressive swings, as shorts moved to cover their bearish positions that they had taken ahead of the new home sales data. Home Depot (NYSE:HD), the largest home improvement retailer, saw a jump of 1.98% to $28.33, posting the biggest percentage gain in the Dow Jones Industrial Average.

Pfizer (NYSE:PFE), the largest pharmaceutical company in the world, lifted the healthcare sector to a 1% gain, as shares gained 1.07% to $15.99. Pfizer announced that it would release the late-stage study results next week of a potential blockbuster blood thinner apixaban, which is developing together with Bristol-Myers Squibb (NYSE:BMY).

And some defensive names like Kraft (NYSE:KFT), the branded consumer food maker, and McDonald’s (NYSE:MCD), also saw some strength, with gains of at least 0.65%.

Telecom was among the best sectors with a 0.6% gain as a group, Verizon (NYSE:VZ), the owner of the largest U.S. wireless carrier, climbed 0.64% to $26.89.

And Apple (NASDAQ:AAPL), the maker of iPhones and iPads, reversed posting a gain of 1.23%, lifting the sector to a 0.5% gain and contributing in the NASDAQ outperformance. Analysts speculated that a new Apple TV would be released by the Holiday season or early next year. Apple has had several attempts to make the device the home entertainment hub, with limited success, the next iteration will attempt to make the device as another must have blockbuster product.

Crude oil rose from an 11-week low after the dollar slipped against the euro for the first time in six days, bolstering the appeal of commodities to investors. The greenback declined after sales of U.S. new homes dropped in July to the lowest level on record. Prices tumbled earlier when an Energy Department report showed that crude and gasoline stockpiles surged last week as demand fell.

On Thursday, the market started to the upside building on Wednesday’s reversal after a stronger than expected weekly jobless claims report. The Labor Department reported that the number of Americans filing for unemployment benefits fell more than expected to 473,000. As for continuing claims, they eased to 4.46 million from 4.52 million in the prior week.

The moved to the upside hit resistance at the 1060 level in the S&P 500, with market participants lacking conviction to push thru this level. After a couple of hours of listless trade near resistance, stocks rolled over for the market to post its sixth loss in five sessions. Technology, energy, and financials were the worst performing sectors.

Technology shares lost 1.1% as a group, leading to an underperformance by the NASDAQ. During the day, Dell (NASDAQ:DELL) announced that it had counter bided for 3Par (NYSE:PAR), hoping to fend off Hewlett-Packard’s (NYSE:HPQ) bid; however investors seemed poised for a bidding war by the two tech giants to continue. After the closing bell, HP made a $1.8 billion counter bid for 3Par, which represented an 11% premium over Dell’s recent bid.

Cisco (NASDAQ:CSCO), the world’s largest maker of networking equipment, helped technology shares lower, as shares tumbled 2.40% to $20.7, posting the biggest percentage decline in the Dow Jones Industrial Average. Cisco announced a deal to buy privately held ExtendMedia, the provider of content management systems that manage the entire life cycle of video content through the monetization of pay media and ad-supported business models.

Other weak tech stocks were IBM (NYSE:IBM), the IT solutions and consulting services provider, and Intel (NASDAQ:INTC), the largest chipmaker in the world, as they fell at least 1.62%. Analysts trimming their target price on Accenture (NYSE:ACN) bogged down IBM and Intel was hit by downgrades in the semiconductor space.

Financial shares lost 0.9%, dragged down by big banks. The KBW Bank Index had been up nearly 2% at its session high. It inevitably reversed to post a 0.7% loss, or its sixth consecutive slide. The U.S. biggest lenders, JPMorgan (NYSE:JPM) and Bank of America (NYSE:BAC), were among the weakest Dow components with losses of at least 1.50%.

At the end of the week, stocks with a rally, as investors shrug off Intel’s reduced outlook, as the economy grew more than expected in the second quarter and investors speculated the Fed will provide additional stimulus to help the economic recovery.

Trading started on a positive note, after the government revised second quarter GDP to 1.6%, which was down from the originally reported 2.4% rate, but better than the 1.4% growth economists were expecting. Market participants also focused on personal consumption that was revised upward to reflect 2.0% growth after it had been expected to remain at 1.6%.

The early gains faded somewhat ahead of the release of the final Consumer Sentiment Survey for August from the University of Michigan. The Survey was revised down slightly to 68.9 from 69.6 and was also below the reading of 70.0 that had been widely expected. But focus turned quickly to Intel (NASDAQ:INTC), the largest chipmaker in the world, as the company said that third quarter revenue would fall short of Wall Street expectations.

The news, coupled with pricing worries in the flash memory chips, sparked a sell-off that quickly send the Dow Jones Industrial Average to a loss of more than 100 points and the S&P 500 back to its August low of 1040.

However stocks managed to find support and staged a quick sharp rebound that sparked short covering helped by comments made by Ben Bernanke in a speech on the state of the economy. The Fed Chairman reassured investors that the Fed is ready to help stabilize the recovery and that there are additional measures the Central Bank may take to provide additional stimulus.

The market attracted a broad bid, with 29 of the 30 Dow components posting gains. Hewlett Packard (NYSE:HPQ) was the only component on the red, as investors sold the stock on concern over its bidding war with Dell (NASDAQ:DELL) over the utility storage company, 3Par. Hewlett raised the bid for the company once again to $30 per share.

Economic sensitive stocks saw the sharpest gains. Materials, energy, financials, and industrials were the best performing sectors, with all of the key S&P 500 sectors posting gains.

Materials were helped by a lackluster session for the Dollar, which finished flat, and by strength on the underlying commodities. DuPont (NYSE:DD), the third largest chemical maker in the U.S., jumped 3.85% to $41.01, posting the biggest percentage gain in the Dow Jones Industrial Average. The chemical maker is the best performing Dow component year to date, as investors piled into cyclical recovery plays.

Alcoa (NYSE:AA) also helped by metal prices moving higher on speculation the Fed will stabilize the recovery and demand will not falter, was the second best Dow component, after shares gained 3.10% to $10.32.

Industrial stocks gained 2.1% as a group, with Caterpillar (NYSE:CAT) and Boeing (NYSE:BA) helping the sector higher as they gained more than 3% in the session. Boeing rallied, despite announcing another delay on the first delivery of its new 787 Dreamliner. A Rolls Royce engine blew up in testing, pushing back the schedule for delivery of the first plane to middle of the first quarter next year.

Energy posted a strong 2.8% gain, helped by crude oil strength. Crude oil climbed 2.5% to settle at $75.19 per barrel, as it continues to recover from hitting a 2-month low last week. Traders pushed prices higher on speculation demand will stabilize.

And investors also moved into financial shares on speculation the economy will improve. American Express (NYSE:AXP), the credit card issuer, gained 2.97% to $40.91, as data showed the economy grew better than expected and personal consumption was revised upward.