MarketView for May 22

 

Summary

 

The major equity indexes ended the day in positive territory for the second straight day on Thursday, led by small-cap stocks, while the Nasdaq climbed on a rally in biotech shares. The surge in biotech stocks extended the recent trend of volatile trading.

 

Small-caps and the so-called momentum often move without specific news. Among the momentum names, noted for high growth and perceptions of excessive valuation, Vertex Pharmaceuticals closed up 6 percent to end the day at $71.18, while Alexion Pharmaceuticals gained 2.5 percent to end the day at $160.48. Shares of Salesforce.com, the world's largest manufacturer of online sales software, advanced 6.1 percent to close at $53.27.

 

The Russell 2000 rose 0.9 percent, outperforming the broader S&P 500. The Russell fell into correction territory last week - defined as a 10 percent decline from a recent closing high - but has since retraced some of that, and is now less than 8 percent from its peak.

 

Hewlett-Packard posted a larger-than-expected decline of 1 percent in quarterly revenue as it struggled to maintain its grip on a shrinking personal computer market, while protecting profit margins. The stock reversed earlier gains to end down the day down 2.3 percent at $31.78.

 

Housing stocks ranked among the market's best performers after existing home sales rebounded in April. Homebuilders were among the S&P 500's largest gainers, with D.R. Horton up 2.4 percent at $22.65 and PulteGroup up 2.2 percent at $19.22.

 

The S&P 500 is about 10 points away from its record intraday high set on May 13. For the past week, the index has been caught between the high and its 50-day moving average as data left investors unsure about the pace of the economic recovery.

 

Shares of JD.Com soared in their market debut on Thursday, rising 10 percent to close at $20.90 after the Chinese e-commerce company raised $1.78 billion in an initial public offering.

 

Best Buy was up 3.4 percent to $26.22. The company reported first-quarter earnings that exceeded expectations and domestic comparable-store sales that fell more than expected.

 

Existing home sales rose in April and the supply of properties on the market hit the highest level since August 2012, hopeful signs for the housing market's stalled recovery.

 

Approximately 5.1 billion shares changed hands on the major equity exchanges, a number that was below the month-to-date average of 5.9 billion shares according to BATS exchange data.

 

Economic Data Mixed

 

Home re-sales rose in April and the supply of properties on the market hit its highest level since August 2012, hopeful signs for the stalled housing market recovery. At the same time, a report by the Labor Department indicated an increase in first-time applications for unemployment benefits, although the underlying trend still pointed to a strengthening in labor market conditions.

 

The National Association of Realtors reported that existing home sales increased 1.3 percent to an annual rate of 4.65 million units, marking the second increase in sales in nine months. While that was a bit less than the consensus expectation of 4.68-million unit pace, it suggested the sector was regaining its footing after stumbling in the second half of 2013 under the weight of higher mortgage rates and house prices.

 

Sales are still down 15 percent from a peak of 5.38 million units hit in July. Compared to April last year, sales were down 6.8 percent.

 

Expensive home loans and rising home prices have sidelined first-time buyers from the market. Investors also are stepping back.

 

Though the usually cold winter depressed activity, a dearth of homes for sale also stymied demand. Sales are expected to gradually trend higher for the rest of 2014 as job growth and the overall economy accelerate.

 

Yet, there is reason to be optimistic. The inventory of unsold homes on the market increased 6.5 percent from a year-ago to 2.29 million in April and the median home price increased at its slowest pace since March 2012.

 

"The sales slowdown experienced is pretty much coming to an end," said Lawrence Yun, the NAR's chief economist.

 

The months' supply of existing homes increased to 5.9 months, the highest since August 2012, from 5.1 months in March. Six months' supply is normally considered a healthy balance between supply and demand.

 

In a separate report, the Labor Department said initial claims for state unemployment benefits rose 28,000 to 326,000 for the week ended May 17. The four-week average, which irons out week-to-week volatility, rose by only 10,500.

 

Last week's claims data covered the survey period for May nonfarm payrolls. With claims rising between the April and May survey periods, it is likely that job growth slowed somewhat from April's brisk 288,000 gain.

 

The claims report showed the number of people still receiving benefits after an initial week of aid fell 13,000 to 2.65 million in the week ended May 10.

 

Manufacturing Improves

 

Manufacturing growth hit a three-month high in May, while private business activity in the euro zone grew at just under its fastest pace in three years, surveys showed on Thursday.

 

In Asia, China's factory sector turned in its best performance this year in May but still contracted for the fifth straight month, while Japanese factory activity cooled slightly in May but at a slower pace than in April.

 

Markit said its preliminary or "flash" of our domestic Manufacturing Purchasing Managers Index rose to 56.2 in May from 55.4 in April, while factory output growth hit its fastest pace since February 2011, rising to 59.6 from 58.2.

 

In Europe, an unexpected pickup in the service industry was offset by lackluster factory activity, but was enough to show the euro zone's fragile recovery has some traction.

 

Markit's Composite Purchasing Managers' Index for the currency bloc, seen as a good indicator of growth, edged down to 53.9 from a near three-year high of 54.0 in April, matching the consensus forecast in a Reuters poll of analysts.

 

Readings above 50 indicate expansion, and Markit said the index pointed to second-quarter economic growth of 0.5 percent, which would be the strongest in three years.

 

However, the data also indicated the largest split between the euro zone's two largest economies since February. France contracted while Germany bounded ahead, although led by services rather than manufacturing.

 

Decent overall growth is good news for the ECB, but with official inflation at 0.7 percent, well below the central bank's 2 percent ceiling, it will be concerned that companies slashed prices for the 26th month running to drum up trade.

 

The ECB is expected to cut what little it has left of its main interest rate and push the deposit rate below zero next month.

 

The economic picture was also mixed for China. HSBC/Markit's Flash China Manufacturing PMI rose to 49.7 in May from April's 48.1, reaching its highest since December and beating the median forecast of 48.1.

 

Sub-indexes measuring output as well as domestic and foreign demand all recovered sharply. But factory jobs were shed for the 13th month and the overall index still pointed to contraction.

 

However, just as China and the ECB look set to ease policy the Bank of England is becoming the favorite to be the first major central bank to hike interest rates - probably in the second quarter of next year.

 

Federal Reserve policymakers last month also began laying groundwork for an eventual retreat from easy monetary policy with a discussion of how to best control interest rates as they remove trillions of dollars from the financial system.

 

Meanwhile a survey showed Japanese factory activity contracted slightly in May but at a slower pace than in April, suggesting some recovery from the impact of a sales tax increase last month. The Markit/JMMA flash Japan Manufacturing PMI rose to a seasonally adjusted 49.9 in May from April's 49.4.