U.S. stocks extended upon Tuesday’s rally to once again recover some of the losses of the past month.  The S&P 500 Index, since beginning to fall apart in early August, remains bound by 1200 on the upside and 1120 on the downside – a wicked 6.66% range.  We’ve bounced either up or down in this range five times now since August 8.   At this point, the correction (measured from the April 29 three-year high) has been shaved by four percentage points to 13.65%.

Financial, utility and industrials shares led the market higher – financials and industrials were the worst-performing groups of the year prior to yesterday (financials still are the worst).  Consumer staples, energy and tech were the day’s worst-performing sectors. 

Crude, which has shown a strong correlation to the direction of stocks, failed to rise – slipping a few cents per barrel.  Beyond the stock/oil disconnect, crude also bucked the weekly energy report that showed supplies fell more than expected last week. 

Unfortunately, the reason supplies fell was not because consumer demand was up (gasoline demand fell 2.0% last week) but rather because refining rates jumped to the highest level this year as the refining margin (the profit from processing three barrels of oil into two barrels of gasoline and one of heating oil) had jumped to the highest level in at least 25 years – just off that high currently. 

Retail gasoline is still chillin’ at $3.58 – down from the recession-inducing $4 back in May but 90 cents above the year-ago level.  These refining margins will continue to encourage the production of more gasoline though and so long as oil doesn’t ramp up again, the pump price should come down some more as supply outstrips demand. 

Things to watch over the next couple of days are Steve Job Inc. (which trade under the ticker AAPL), Bernanke’s speech tomorrow morning and Hurricane Irene.   AAPL shares are behaving very well this morning, down just 2.65%, after Steve Jobs announced he’ll be stepping down as CEO – he’ll still be around as he becomes chairman -- (anyway, the stock pretty much trades at a multiple that already reflects his departure).  Bernanke will deliver his annual speech from Jackson Hole, just 30 minutes after Q2 GDP is revised down from an already anemic 1.3%.  Hurricane Irene is tracking up the East Coast and models (for what they are worth) have it hammering Long Island and Boston this weekend. 

Market Activity for August 24, 2011

Sector Activity for August 24, 2011

Mortgage Apps

The Mortgage Bankers Association’s gauge of applications fell 2.4% last week as both purchase and refinancing activity slipped.  This is the eighth decline out of the past 13 weeks and would be worse if not for a couple of large jumps in refi activity along the way. 

Refinancing apps fell 1.7% last week after the 8% and 30% bounces in the previous two week, respectively.  The average rate on the 30-year fixed mortgage actually rose seven basis points to 4.39% even as the Fannie Mae Commitment Rate fell 10 basis points – that wider spread, needless to say, is not helpful.

Purchase applications fell another 5.7% last week, which follows the 9.1% slide in the previous week.  The index that tracks these apps fell to the lowest level since January 1997.

Durable Goods orders

The Commerce Department reported that durable goods orders came in much better-than-expected for July as headline orders rose 4.0% (+2.0% expected) after the 1.3% decline in June (which was upwardly revised from -2.1%) and ex-transportation orders rose 0.7% (-0.5% expected) after rising 0.6% in June (upwardly revised from 0.1%).  However, the business proxy – non-defense capital goods ex-aircraft, which measures business expenditures on equipment and software -- fell 1.5% (-1.6% expected) after rising 0.6% in July (also upwardly revised from -0.4%). 

The headline rise of 4.0% was vastly boosted by transportation orders as vehicles & parts orders jumped 11.5% and commercial aircraft orders soared 43.4%. 

But these orders are highly volatile, so that’s why one should focus more on the ex-transportation reading.  This measure was also boosted by the transportation sector in an indirect manner as primary metals orders jumped 10.3%.  Most items outside of transportation declined for the month, so I would say that the data looked a bit better on the surface than it actually was.  Orders for machinery, electrical equipment, computer/electronics were all down.  Consumer goods were up 0.8%.  Year-to-date, ex-trans durable orders are up 1.6%. 

And the business spending proxy was down 1.5% for July, which puts this important engine of not just economic growth but also job growth up just 0.7% thus far this year. 

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Have a great day!

Brent Vondera, Senior Analyst