The Dow Jones Industrial Average overcame a rocky start to finish in positive territory on Monday, as investors looked past escalating tensions in the Middle East. The blue chip index closed up 0.2% after falling early on news of Israel’s offensive against Hamas following last week’s attack that killed over 900 people.
Energy and defense stocks led the gains. Chevron, Exxon Mobil and oil services company SLB popped higher despite U.S. Treasury Secretary Janet Yellen’s pledge to enforce the $60 per barrel price cap on Russian oil. Meanwhile, defense contractors General Dynamics, L3Harris Technologies and Northrop Grumman rallied strongly amid rising geopolitical risks.
The tech-heavy Nasdaq composite reversed opening losses to gain 0.4%, aided by market leader Zscaler which rose 3.2%. The S&P 500 also shook off a weak open to add 0.6%. All 11 S&P 500 sectors ultimately closed higher, with energy and industrials posting the biggest gains. Small caps also charged higher, with the Russell 2000 climbing 0.5%.
Dovish Fed Comments Help Temper Concerns
Comments from Federal Reserve officials indicating the central bank may not need to raise interest rates as high as feared helped improve sentiment. Dallas Fed President Lorie Logan noted that if long-term rates stay elevated due to higher term premiums, the Fed may have less need to aggressively hike its benchmark rate.
While Logan said the Fed’s rate-setting committee may still need to do more to control inflation, her remarks signaled a potential pause in the aggressive rate hikes that have weighed on stocks this year.
The major indexes shook off opening pressure after Logan’s comments soothed concerns about the geopolitical turmoil in Israel. Prime Minister Benjamin Netanyahu has warned the offensive against Hamas “is only the beginning”, stoking fears of a prolonged conflict.
“U.S. stocks dropped in the wake of the Hamas attack on Israel but have pared losses after Fed’s Logan downplayed the need for more rate hikes,” said Edward Moya, senior market analyst at Oanda. “It was supposed to be a quiet Monday morning given the Columbus Day holiday, which includes the closure of the U.S. bond market.”
Energy Stocks Gain Despite Yellen’s Oil Price Pledge
Oil stocks rallied even as Yellen vowed to strictly enforce the price cap on Russian oil meant to starve Moscow of revenue funding its war against Ukraine.
“We are looking at enforcement very carefully and we want to make sure that market participants are aware we take this price cap seriously, and, to the extent Western services are used, we mean business about abiding by the cap,” Yellen told The Wall Street Journal.
The pledge failed to dent oil stocks, however, as traders focused on potential supply disruptions from the Middle East turmoil. SLB surged 4.6%, Exxon climbed 3.5% and ConocoPhillips jumped 5.6%. Oil services firm Baker Hughes and UK oil major BP both added around 3%.
Defense Stocks Surge on Geopolitical Uncertainty
Heightened global tensions lit a fire under defense stocks, which have lagged the broader market this year. General Dynamics powered 8.4% higher, sailing past its major moving averages. L3Harris Technologies also bested its 50-day line with a 9.9% leap, while Northrop Grumman vaulted 11.4% above both its 50-day and 200-day averages.
Woodward, which makes control systems for military vehicles, aircraft engines and power generation equipment, gained 2.1% and moved above its 50-day average. While still below its recent flat base entry, Woodward’s relative strength line hit a new high.
The sharp gains in defense names underscored traders’ concerns about geopolitical uncertainty and heightened global risks. Russia’s ongoing assault on Ukraine combined with the Israel-Hamas conflict stoked demand for defense stocks as investors braced for the potential of wider conflict.
Buffett Stocks Test Aggressive Entries
A pair of stocks owned by Warren Buffett’s Berkshire Hathaway tested aggressive entries, though investors may want to wait for more constructive action before buying.
Chevron gapped above its 50-day and 200-day moving averages after reports emerged that it previously considered acquiring Occidental Petroleum, another Berkshire holding. Occidental also cleared its major moving averages.
While those moves could offer very early entries, both stocks have struggled recently and sport lackluster AM Composite Ratings. Chevron sits at 61 and Occidental is even weaker at 46. AM recommends buying stocks showing superior earnings and price strength.
Cadence Design In Semi Breakout
With the market back in confirmed uptrend status, breakouts warrant attention. Cadence Design Systems edged above a cup-with-handle buy point of 247.50 in lighter trade. The chip design software firm sports a top-notch 93 AM Composite Rating. Its strong relative strength line reflects its leading performance.
While its muted Volume % Change of -2% raises some questions, Cadence’s base counts as a high-handle with a 10% depth. High handles typically see lighter trade. Cadence offers a potential early entry in the surging computer software-chip equipment industry group.
In summary, while escalating Middle East tensions rattled stocks early Monday, the major indexes rebounded as Fed comments downplaying the need for aggressive rate hikes outweighed geopolitical uncertainty. Further gains hinge on interest rate and inflation outlooks even as geopolitical hotspots bear close watching. With leading stocks emerging, growth-minded investors should build watchlists and look for constructive chart action. Stay tuned to American Money for the latest actionable setups and in-depth research.