Markets Rally Gives Way on Weaker Confidence

Markets in the US may be forming a top after having rallied more than 11% from July 10 lows. Since putting out an impressive gain early in last Thursday’s session, markets have traded in a tight range around 9050 to 9100 while making temporary higher highs on Monday and Tuesday. Despite that, pressure may be rising against the optimism as the CBOE volatility index climbed off its recent low of 23.09 on Friday to back above 25.0. Also, risk appetite may be waning as the dollar index bounced off support at 78.3 that could see the currency appreciate against major crosses. RSI has crossed back under 70, although candlesticks charting indicates the Dow would need to fall under 9,000 to give conviction for bears.

[B]Dow Jones Industrial Average 2-Month Chart


Economic releases today proved mixed as the [B]S&P/Case-Shiller Home Price Index[/B] showed contraction narrowed while the underlying index climbed to 139.84 in May, the first gain since the index hit a record high of 206.52 in July 2006. Of note, the index remains at levels not seen since mid-2003, when the housing boom began to escalate sharply. Optimism that the worst of the sector’s troubles is over has lifted financial stocks and may continue to propel upside in banks and construction companies. Also, consumers may increase spending as concerns ease over house values.

Also attracting significant attention today, the Conference Board index of [B]Consumer Confidence[/B] followed that of the University of Michigan with a lower reading for July. The figure posted at 46.6, lower than the survey estimate of 49.0 as the index now dropped for the second month. Specifically, the present situation component came in at 23.4, its lowest in four months, while expectations fell slightly for the second month. Consumers reporting good business conditions rose slightly to 9.1% while those holding negative views climbed to 46.3% from 45.3%. Meanwhile, employment figures showed labor conditions remain dire as surveyed responses showed 48.1% of those polled reporting jobs are harder to get, while those reporting jobs are plentiful fell to 3.6% from 4.5%. Other indications from the release include survey figures for purchasing in the next six months. A smaller portion of respondents plan to buy an automobile compared to the previous month while those interested in a home also declined. Total plans to buy appliances also fell for the second month, signaling that durable goods orders may decline.

While the US economy is seeing moderation in job cuts and improving conditions in several indicators, along with better-than-expected earnings from major firms, the US consumer remains vital to recovery as spending accounts for more than two-thirds of GDP. Lower confidence and survey responses indicate that spending habits may not improve sharply and that growth in the third quarter is far from certain.