MarketView for July 2

Summary 

The financial markets edged lower on Tuesday, erasing earlier gains as the S&P 500 index met resistance around its 50-day moving average, a level the index has not been able to close above for the past two weeks. The 50-day moving average for the S&P 500 was 1,623.94. The benchmark index has not been able to close above its 50-day moving average since closing below that closely watched technical level on June 20.

The major equity indexes traded higher until early afternoon, boosted by positive car sales and factory orders. The S&P 500 rose as high as 1,624.26 early in the session. Among the S&P 500's 10 sectors, the energy sector index rose 0.2 percent after crude oil prices hit a nine-month high as turmoil in the Middle East unsettled Wall Street.

The S&P 500 is 3.3 percent below its May 21 record closing high of 1,669. Small caps have closed within a hair's breadth of all-time highs reached in May. The S&P Small-Cap 600 index is about 0.8 percent below its all-time closing high, and the Russell 2000 index is 1.1 percent below its best close.

The CBOE Volatility Index, Wall Street's favorite barometer of investor anxiety, rose 0.4 percent to 16.44. Volatility has remained elevated from two weeks ago after the Fed said it expected to reduce its $85 billion a month of bond buying, which has helped drive the Wall Street's rally this year. Since those comments, several Fed officials have said the central bank would not prematurely end its monetary stimulus program. Those reassuring remarks helped stabilize the market.

In Tuesday's session, shares of Ford hit a 52-week high of $16.21 after the company and rival General Motors reported strong sales last month. Ford said the overall U.S. auto industry will report its best monthly sales rate since December 2007. Ford's stock shot up 2.8 percent to close at $16.18 while GM's shares rose 0.3 percent to end the day at $34.10.

The recent outperformance by stocks with smaller market capitalizations and higher volatility point to a belief that the recent rise in interest rates is constructive, despite the S&P 500 edging lower, according to a Monday note from Goldman Sachs strategists.

"The negative performance at the index level has been driven more by positioning and policy uncertainty than a deteriorating view on economic growth," they wrote.

William Dudley, president of the Federal Reserve Bank of New York, on Tuesday repeated comments made last week, saying the central bank is likely to support the economic recovery for some time.

Shares of Constellation Brands fell 3.6 percent to $51.25 after its first-quarter earnings and revenue missed expectations.

Rumors on the Street indicate that Pfizer and Novartis may make preliminary bids for Onyx Pharmaceuticals. On Sunday, Onyx turned down a roughly $10 billion offer from Amgen. Onyx rose 3.2 percent to close at $135.58 after hitting a 52-week high of $135.69. The stock gained more than 50 percent in Monday's session.

About 6.1 billion shares changed hands on the three major equity exchanges, a number that was slightly below the daily average so far this year of about 6.4 billion shares.

Auto Sales Point to Healthier Economy

New motor vehicle sales in June were poised to record their strongest month in more than 5-1/2 years and factories posted a second straight month of gains in new orders in May, indicating some pick-up in economic activity. Adding to the improving economic picture, home prices posted their biggest annual increase in more than seven years in May, other data showed on Tuesday.

The economy appears to be finding some momentum after slowing early in the second quarter as the effects of cooling global demand and tighter fiscal policy took hold.

General Motors and Ford reported stronger-than-expected sales, and Chrysler Group's sales met analysts' expectations. Toyota also reported strong U.S. sales.

The sturdy sales gains are being driven by demand for pickups, mainly because of the strengthening housing recovery. More than half of the large pickup trucks on U.S. roads are more than 11 years old, manufacturers say. As such, they are being replaced, driving up demand.

Overall auto industry sales in June are on track to increase about 10 percent, and according to GM, will hit their strongest annual sales pace since November 2007.

Auto sales account for about 16 percent of overall retail sales. The anticipated hefty gains suggest retail sales probably increased in June for a second straight month.

Factory and Housing Data Improves

Housing is regaining its dominance in the economy, helping, for now, to blunt the blow from belt-tightening in Washington, a downturn in Europe and slowing growth in China. A report by data analysis firm CoreLogic showed house prices rose 2.6 percent in May from April and were up 12.2 percent compared to May last year, the biggest year-over-year increase since February 2006.

Excluding distressed sales, properties that have been seized by lenders and short sales, prices increased 11.6 percent on a yearly basis. In addition to boosting household net worth, which supports consumer spending, the housing recovery has spilled over to manufacturing by fueling demand for construction materials and consumer items like stoves and refrigerators.

In a separate report, the Commerce Department said new orders for manufactured goods increased 2.1 percent after advancing 1.3 percent in April. Factory orders rose in most categories in May.

Manufacturing slowed in recent months, weighed down by deep government spending cuts and slowing global demand, especially in China and recession-hit Europe. But signs are the loss of momentum has run its course or is at least starting to ebb.

The Commerce Department also revised up the increase in new orders for durable goods - manufactured products expected to last three years or more - by a tenth of a percentage point to 3.7 percent.

Even more encouraging, orders for non-defense capital goods excluding aircraft - seen as a measure of business confidence and spending plans - increased 1.5 percent instead of the 1.1 percent rise the department had reported last week.

The increase in the shipments of these so-called core capital goods, which go into the calculation of equipment and software spending in the gross domestic product report, was revised up to 1.9 percent from 1.7 percent. The economy grew at a 1.8 percent annual rate in the first three months of 2013.

Indeed, unfilled orders for factory goods - a good indicator of future manufacturing activity, rose 0.8 percent in May. Unfilled capital goods orders excluding defense and aircraft were up 1 percent.