MarketView for May 23

Summary 

The major equity indexes put forth a late-day reversal on Wednesday, rallying into the close in another volatile session as a sharp rise in materials shares sent the S&P 500 index higher and gains in Apple helped lift the Nasdaq. The reversal shortly before the market's close was a mirror image of Tuesday when stocks gave up gains in the last minutes of trading.

The late rebound suggested investors saw value in the market after the S&P 500 fell just below 1,300 but also underscored the skittishness of the trading environment. The S&P 500 is down 7 percent from a peak in April but is up 4.9 percent for the year so far. There is some expectation that the index will test its 200-day moving average at around 1,280, about 2 percent below current levels.

Towards the close traders cited rumors that the European Union was considering a proposal to guarantee bank deposits across the bloc. Such a move could assuage fears of bank runs in Spain and Greece. The rumors, which one trader said may have originated in London, appeared to be unfounded and served to highlight the markets' current sensitivity to events in Europe.

Shares of materials companies led the S&P 500. Alpha Natural Resources rose 5 percent to close at $11.70, while on the Nasdaq Apple was up 2.4 percent to close at $570.56.

For most of the day shares fell by more than 1 percent as EU officials said euro zone countries must prepare contingency plans for a possible Greek exit of the currency bloc, while a weak outlook from Dell cast doubts about the strength of global tech spending.

Dell fell more than 18 percent and hit other tech stocks as the revenue forecast from the third-largest computer maker spurred fears that global tech spending was declining faster than thought. Dell ended the day down 17.2 percent to close at $12.49, its largest one-day decline in more than a decade.

Hewlett-Packard fell more than 3 percent during the regular session. However, shares of the tech company rose 10 percent in extended trading after it released financial results. HP outlined a multi-year plan including job cuts of 27,000 employees, or about 8 percent of its workforce, to spur growth.

An agreement by euro-zone officials on contingency planning for a Greek exit of the euro zone, or "Grexit" as some investors are now calling it, supposedly took place during a teleconference of the Eurogroup Working Group on Monday. 

Facebook and banks, including Morgan Stanley, were sued by the social networking leader's shareholders, who claimed the defendants hid Facebook's weakened growth forecasts ahead of its $16 billion initial public offering. The stock was up 3.2 percent at $32 after falling more than 30 percent from its peak on Friday.

The declining price of crude oil also depressed the energy sector. Domestic July crude oil futures fell $2.30 to a session low of $89.55, trading below $90 a barrel for the first time since November 1, on easing concerns about Iran's nuclear dispute with the West and increasing worries about global economic growth.

Approximately 7.52 billion shares changed hands on the three major equity exchanges, as compared with a year-to-date average of about 6.84 billion shares.

Crude Prices Fall on Increased Inventory

Crude oil futures extended declines after the Energy Department said stockpiles rose to a 22- year high. Supplies climbed 883,000 barrels to 382.5 million barrels. Inventories were forecast to gain 1.65 million barrels, according to the median of 12 analyst estimates in a Bloomberg News survey.

Crude oil for July delivery fell $1.37, or 1.5 percent, to $90.29 a barrel at 10:40 a.m. on the New York Mercantile Exchange. Oil traded at $90.71 a barrel before release of the inventory report at 10:30 a.m. in Washington.

Oil also fell as European Union leaders are gathering in Brussels tnnight to discuss the euro-region's debt troubles and after Iran agreed to grant access to United Nations nuclear inspectors.

Also, gasoline inventories fell 3.3 million barrels to 201 million last week, the Energy Department said today. Stockpiles were forecast to slip 650,000 barrels, according to the median of 12 analyst estimates in a Bloomberg News survey.

Distillate supplies, which include heating oil and diesel, fell 309,000 barrels to 119.5 million. Stockpiles were estimated to decrease 500,000 barrels.

New Home Sales Up

According to a report released on Wednesday by the Commerce Department, new-home sales increased 3.3 percent in April from March to a seasonally adjusted annual rate of 343,000 units,. Sales rose sharply in every region of the country but the South. The gain pushed the annual sales pace to its second-highest level in two years. While the increase is encouraging, keep in mind that new homes are still selling at half the rate consistent with healthy markets.

The increase follows other reports this week that suggest steady improvement in housing. Sales of previously occupied homes rose to near a two-year high in April. And Toll Brothers, a key U.S. builder of luxury homes, reported that it returned to profitability in the second quarter. Toll Brothers said Wednesday that home deliveries and signed contracts on new homes rose in the quarter that ended April 30. Its shares rose more than 2 percent. The homebuilder earned $16.9 million, or 10 cents per share, in the latest quarter. A year earlier it lost $20.8 million, or 12 cents per share.

A pickup in hiring, cheaper mortgages and lower home prices in most markets have made home buying more attractive.

Sales of new homes rose 28 percent in April from March in the Midwest and the West, and 7.7 percent in the Northeast. Only in the South did sales fall, by 10.6 percent. The median price rose to $235,700, a slight increase from March.

On Tuesday, the National Association of Realtors said sales of previously owned homes increased 3.4 percent to a seasonally adjusted annual rate of 4.62 million. That nearly matched January's sales pace of 4.63 million, which had been the best in two years.

Though new homes represent less than 20 percent of the housing market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to statistics compiled by the National Association of Home Builders.

Builders have grown more confident since last fall, in part because more people are expressing interest in buying a home. In May, builder optimism rose to the highest level in five years, according to a monthly index compiled by the builders' group.

Homebuilders reported improving sales and higher traffic from prospective buyers, the survey showed. A gauge measuring confidence in sales over the next six months also increased.  And recent job gains have likely made it easier for more Americans to purchase a home. Employers have added 1 million jobs in the past five months. And unemployment has dropped a full percentage point since August, from 9.1 percent to 8.1 percent in April.

Mortgage rates, meanwhile, have fallen to record lows, making home-buying more affordable. Still, many would-be buyers are having difficulty qualifying for home loans or can't afford larger down payments required by banks.

Builders still face a tough environment. They are struggling to compete with deeply discounted foreclosures and short sales — when lenders allow homes to be sold for less than what's owed on the mortgage.