Stocks May Capitalize on Oil's Sharp Retreat - RTTNews Daily Market Analysis

(RTTNews) - The major U.S. index futures are pointing to a higher opening on Tuesday. Sentiment is likely to improve on a sharp drop in the price of oil, which has begun to recede as Hurricane Gustav cruised through the U.S. Gulf of Mexico region without causing much of havoc to oil installations in the region. Traders may also focus on the construction spending and the results of the ISM's manufacturing survey to be released shortly after the markets open.

U.S. stocks extended their lean patch in the week ended August 29th, as mixed economic reports and credit fears weighed on the markets. On Monday, the major averages pulled back sharply amid concerns over the health of financial firms triggered by a few negative analysts' comments on AIG (AIG | Quote | Chart | News | PowerRating). Meanwhile, the markets closed on a mixed note in Tuesday's session even after the release of a couple of positive economic readings. Buoyancy in the oil space led to strong upward moves in oil and other commodity-related stocks.

The major averages closed with noteworthy gains in the next two trading sessions. On Wednesday, a stronger-than-expected increase in durable goods orders supported the markets, while on Thursday, stocks latched on to a bigger-than-expected upward revision of the second quarter GDP growth estimate. That said, stocks retreated again on Friday in reaction to a report that showed weak personal income growth and the prevalence of inflationary pressures.

For the week, the Dow declined 0.73% and the Nasdaq Composite Index fell 1.95%, while the S&P 500 Index slipped 0.73%.

Among the sub-indexes, the Philadelphia Oil Service Sector Index posted a weekly loss of 1.06% and the Philadelphia Semiconductor Index receded 3.65%. Meanwhile, the Amex Biotechnology Index fell 2.46% for the week. Utility and airline stocks also slipped during the week. However, the KBW Bank Index and the Amex Securities Broker/Dealer Index advanced 3.11% and 3.97%, respectively for the week.

The Amex Securities Broker/Dealer Index has shown some strength since the middle of last week. Nevertheless, the revival has also been within the long-term downtrend that has been in place since the middle of 2007. On Friday, the index formed a small shadowed doji, which is indicative of a consolidating session. Normally, doji candles are formed at or near market tops or bottoms, indicating that the market has exhausted its previous bullish or bearish trend move and should begin to reverse or stall.

Does that signal that the sentiment in the space will improve? Given the depth of the credit crisis, it is unlikely that the situation will turnaround any time soon. The 50 as well as the 200-day moving averages are on a downtrend. On the downside, the index has support around 140.58, its mid-March lows of 129.37 and its mid-July lows of 120.47. The key levels to watch for on the upside are 168.92 and 120.47.

Currency, Commodity Markets

Crude oil futures are currently falling sharply after rising modestly in the week ended August 29th. Oil rose in the first three trading sessions of the week, primarily due to the threat of Tropical storm Gustav, which was elevated to hurricane status before it made landfall in Louisiana. However, the black gold pulled back sharply on Thursday after the U.S. government reassured the Street that it would tap its strategic reserves if needed, in order that prices remain contained. The commodity pulled back modestly in the last trading session of the week. A barrel of light sweet crude oil ended the week up $0.87 or 0.76% at $115.46 a barrel.

Currently, crude oil futures are plunging $7.98 at $107.48 a barrel.

Meanwhile, gold futures are receding $29.80 to $805.40 an ounce after ending the previous week up $1.70 or 0.20% at $835.20 an ounce.

Among the currencies, the U.S. dollar retreated further against the yen in the week ended August 29th. The greenback lost 1.63% against the yen to 108.80 yen. However, the dollar advanced 0.80% against the euro to $1.4674 a euro.

Currently, a dollar is trading at 109.04 yen and is worth $1.4475 versus the euro.

Asia Most Asian markets retreated on Tuesday amid a lack of a lead from the U.S. markets, which remained closed on Monday. The Japanese markets opened lower, but it moved into positive territory in early trading. Thereafter, the Nikkei 225 average traded with a modest gain for most of the session before receding sharply in late afternoon. The index closed down 224.71 points or 1.75% at 12,610. A stronger yen weighed on export-related stocks, while commodity stocks also receded. On the economic front, the Bank of Japan released its report on monetary base, which fell 0.2% in August to 87.94 trillion yen. The measure has been declining for the past two months. Auto stocks were lower across the board. Honda Motor and Toyota Motor fell 2.89% and 1.45%, respectively. Among oil stocks, Nippon Oil slid 4.39% and Inpex Holdings declined 6.65%. Mining stocks also came under selling pressure. Itochu Corp., Jtekt, Marubeni, Mitsubishi Corp., Mitsui Engineering & Shipping, Nippon Light Metal, Nippon Soda, Nippon Sheet Glass, NSK, Okuma, Showa Shell, Sumco, Sumitomo, Takashimaya and Toho Zinc were among the other significant decliners. Steel stocks showed mixed sentiment. On the other hand, Bridgestone, Hitachi Zosen, Jfront Retailing, JFE Holdings, Kajima, Nippon Paper, Nomura Holdings, Ricoh, Obayashi and Pioneer saw some buying interest. Australia's All Ordinaries, which ignored a weak opening and rose sharply in early trading, advanced significantly till the mid-session. Thereafter, selling pressure dragged the index lower, and it closed down 5 points or 0.10% at 5,195. Energy and material stocks declined sharply, dragging the market lower and offsetting the gains posted by stocks belonging to the other sectors. BHP Billiton, Rio Tinto, Newcrest Mining and Rio Tinto came under severe selling pressure. On the other hand, bank stocks advanced. Hong Hong's Hang Seng Index was higher in early trading, but it lost ground in the afternoon only to recover in late trading. The index closed up 136.15 points or 0.65% at 21,043. Index heavyweight HSBC Holdings climbed 0.99%. Property, financial and utility stocks showed mixed sentiment. However, CNOOC, Chalco and FIH came under selling pressure. Europe

The major European markets are trading higher on Tuesday, with the French CAC 40 Index and the German DAX Index gaining 1.64% and 1.62%, respectively, while the U.K.'s FTSE 100 Index is trading up 0.33%.

The European Commission's statistical arm, Eurostat reported that the industrial producer price index of the euro area rose 1.1% in July from the previous month compared to 1% growth in June. On a year-over-year basis, producer prices jumped 9% in July.

U.S. Economic Reports

Although the upcoming week is a holiday-shortened week, there are a few key first-tier economic reports that could sway the markets. Traders may look forward to the release of the Labor Department's non-farm payrolls report on Friday to gauge the strength of the labor market, especially at a time when personal income has been showing softness. Additionally, the markets could also focus on the results of the ISM's manufacturing and services sector surveys.

Additionally, some degree of importance may also be attached to the Commerce Department's construction spending report for July, factory goods orders report for July, the Labor Department's final second quarter productivity and costs report, and the regularly scheduled weekly jobless claims and oil inventories reports.

Going by the mixed messages relayed by the regional manufacturing surveys, one cannot expect much change in the ISM's manufacturing purchasing managers' index. Wachovia expects the employment index to retreat in August after the sharp spike in July and act as a drag on the headline index. That said, the prices paid index may pull back due to a moderation in commodity prices.

Meanwhile, the Labor Department's non-farm employment report is likely to show an eighth straight month of job declines. The job losses are likely to be severe, given a sharp climb in weekly unemployment claims in the recent reporting weeks. However, much of the increase in the weekly claims is seen as a side effect of the extension of the federal government's unemployment benefits program. Meanwhile, the unemployment rate is likely to hold steady around 5.7%.

The Commerce Department's construction spending report to be released at 10 AM ET on Tuesday is expected to show a 0.4% decline in spending for July.

Construction spending eased 0.4% in June from the previous month to a seasonally adjusted annual rate of $1.08 trillion. Year-over-year, spending declined 5.9%. Private and public construction spending fell at a monthly rate of 0.4% and 0.2% respectively. Within private construction, spending on residential construction declined 1.8%, offsetting the 0.8% increase in non-residential construction.

The results of the manufacturing survey of the Institute for Supply Management, which are based on data compiled from purchasing and supply executives nationwide, are due out at 10 AM ET on the same day. Economists expect the index to show a reading of 49.5 for August.

The purchasing managers' index for July eased 0.2 points to 50, barely remaining in the expansion zone. While the new orders index fell 4.6 points to 45, the production and the employment indexes climbed 1.4 and 8.2 points, respectively. Inventories remained in the contraction zone, with the inventories index falling 6.2 points to 45. The prices paid index, though retreating 3 points, remained elevated at 88.5.

Stocks in Focus

Boeing (BA | Quote | Chart | News | PowerRating) could react to the strike call given by the International Association of Machinists, the company's largest labor union. The union said it would recommend that its members to vote against Boeing's contract proposal.

Dillard's (DDS | Quote | Chart | News | PowerRating) is likely to be in focus after it said it completed its acquisition of the remaining 50% stake in CDI Contractors LLC it does not already own. The company said it is buying the stake from a trust established by CDI founder William Edward Clark and a company controlled by the Clark family. Separately, the company also said it would close its travel agency as a part of an initiative to improve profitability through the closure of under-performing stores.

Alcatel-Lucent (ALU | Quote | Chart | News | PowerRating) could react to its announcement that it has chosen Philippe Camus as its new Chairman. The company has also tapped Ben Verwaayen, a former BT executive, as its new CEO.

Google (GOOG | Quote | Chart | News | PowerRating) is likely to be in the spotlight after the company revealed in its blog posting that it would launch a new Web browser called 'chrome' to quickly handle video-rich or other complex Web programs.

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