8/24/2012
By Carlos Guillen, Research Analyst

More Articles by Carlos Guillen

After four days of declines, stocks made a rather encouraging move to the upside after favorable comments from Chancellor Angela Merkel and from Ben Bernanke, while durable goods data had very little impact as it was rather mixed.

Perhaps a bit on the positive side was that durable goods orders landed above expectations. According to the Commerce Department total durable goods new orders in July increased month-over-month by 4.2 percent, higher than the consensus estimate calling for a 2.5 percent gain. However, excluding transportation, new orders decreased by 0.4 percent, lower than the consensus estimate calling for a 0.6 percent rise. And even more discouraging was that orders of non-military capital equipment excluding planes declined 3.4 percent after declining 2.7 percent in the prior month, giving decreasing hope that third quarter gross domestic growth may be better than expected. These orders are considered a proxy for future business investment in items such as computers, engines and communications gear, so a decrease in these for two consecutive months is not encouraging at all. It is becoming apparent that the possibility of tax increases and consumer spending reductions is compelling companies to take preemptive measures in their own capital investments. Moreover, a global economic slowdown is also threatening overseas sales, further exacerbating capital spending reductions.

The more significant driver behind today's market action was that Chancellor Angela Merkel said that Germany will stand behind the Greek government as it struggles to overhaul the economy. This has served to give markets the confidence it needs to move higher. At the same time, the Chancellor made it clear to Greek Prime Minister Antonis Samaras that the conditions for Greece's international bailouts remain in force and that she is deeply convinced he will make every effort to solve the country's problems.

Another market driver today was that Bernanke said that there was room for further action by the Fed. In a letter response to Representative Darrell Issa, Bernake is quoted saying "There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery."

Although volumes ran rather light, ending a four day slump in equities is surely a nice way to end the trading session. Next week promises to be a much more economic data-driven week as we will be getting consumer confidence, pending home sales, personal income, Michigan sentiment and much more.

Carlos Guillen
Wall Street Strategies