Stocks rallied on Friday, as investors focused on Fed Chairman Ben Bernanke’s vow to use “unconventional measures” to meet future crises. And several positive economic reports helped following a week of losses.
Investors warmly greeted news that Q2 GDP increased at an annual rate of 1.6%. Even though it was less than the preliminary rate of 2.4%, it wasn’t as bad as the 1.4% growth that had been expected. And there was a surprise at the increase in personal consumption for the second quarter, which was revised upward to reflect 2% growth instead of the 1.6% that was expected.
But just after the strong opening, stocks sold off sharply on a report that Intel Corporation (NASDAQ: INTC) had revised their Q3 revenue forecast downward. The big chip maker forecast that revenues would be between $10.8 billion and $11.2 billion instead of a prior estimate of $11.5 billion. The Dow took a sudden 110-point drop on the news.
The selling turned out to be short-lived, however, and within minutes the losses were overturned. By 10:30 a.m., the Dow was back on the positive side. Buyers controlled the remainder of the day, and by the closing bell stocks had put in their best performance in three weeks despite an overall loss of 0.6% for the week.
The 10-year Treasury not fell Friday, pushing up its yield to 2.654%. The U.S. dollar finished unchanged despite a rise of almost 1% in the yen amid news that the Japanese central bank will hold an emergency session this week to discuss the sharp rise in the yen to a 15-year high versus the greenback.
On Friday, the Dow Jones Industrial Average rose 165 points, closing at 10,151, the S&P 500 gained 17 points to 1,065, and the Nasdaq jumped 35 points to 2,154.
The NYSE traded just under 1.1 billion shares with advancers over decliners by 6-to-1. The Nasdaq crossed 616 million shares with advancers ahead by about 4.5-to-1.
For the week, the Dow fell 0.6%, the S&P 500 was off 0.7%, and the Nasdaq dropped 1.2%.
Crude oil for October delivery settled up $1.81 at $75.17 a barrel. The Energy Select Sector SPDR (NYSE: XLE) gained $1.32, closing at $52.10.
December gold is the most active contract, and it rose 20 cents to settle at $1,237.90 an ounce. The PHLX Gold/Silver Sector Index (NASDAQ: XAU) rose to 184.14, up 3.76 points.
What the Markets Are Saying
Friday marked the second time last week that the S&P 500 turned up and away from the support at 1,040. That line, which marks the bottom of the important zone of 1,040 to 1,055, has been marked as a strong major support point four times this year (in February, twice in May, and last week). And it has also defined the bottom of the broad summer trading range of 1,040 to 1,130.
Why do I mention the 1,040 support line again after harping on it for at least two weeks? Because some of our readers wondered why, after being on the bearish side of the market since late July, I should suddenly (in their minds) turn bullish and call for a trading bounce.
The reason is very simple: Support lines usually support, and resistance lines usually resist. And they function best when the majority of the public ignores their significance and goes with the near-term trend.
Thus, last week we saw that the AAII Sentiment Index showed 20.74% bullish and 49.47% bearish. The public was scared to death and, as usual, sold out at the bottom. This is why I have cautioned our readers to wait and let the market tell you where it is going. Anticipation of a major breakdown, i.e., the violation of a major support zone, is not as common as the support line holding prices and even triggering an upside reversal.
On Friday, the major indices flashed buy signals from our internal indicators, and the widely followed CBOE Volatility Index (VIX) fell more than 10% — the biggest decline for the VIX in more than two months.
Also, the Dow and the S&P 500 flashed reversal days on Wednesday, along with buy signals from our internal indicator, the Collins-Bollinger Reversal (CBR). And, on Friday, the Nasdaq recorded its second CBR buy signal in three days.
With Friday’s higher close and positive responses from both internal and sentiment indicators, the market is telling us that the current support will probably hold — for now. The next area of major resistance starts at S&P 1,085.
It is time for traders to go long since the near-term trend is now up. But, with the intermediate- and long-term trends down, investors should remain uncommitted.
Today’s Trading Landscape
Earnings to be reported after the close include: Donaldson, Origin Agritech, Prospect Capital and Winn-Dixie Stores.
Economic report due: personal income and outlays (the consensus expects 0.3% for personal income, and 0.1% for core price index).
If you have questions or comments for Sam Collins, please e-mail him at firstname.lastname@example.org.
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