On Friday, stocks opened lower as investors anticipated that little progress would be made from the morning’s fiscal cliff negotiations between congressional heads and the president. But when both Democrats and Republicans appeared to agree that a deal could be done prior to the deadline, the markets rallied.
Even industrial production that was 0.4% lower than expected in October, compared with an expected increase of 0.1%, didn’t dampen the rally. And neither did capacity utilization at 77.8% versus an expected 78.3% slow down the advance.
At Friday’s close, the Dow Jones Industrial Average was up 46 points to 12,588, the S&P 500 gained 7 points at 1,360, and the Nasdaq rose 16 points to close at 2,853. The NYSE traded 948 million shares and the Nasdaq crossed 575 million. On the Big Board, advancers outpaced decliners by 2.8-to-1, and on the Nasdaq, advancers were ahead by 1.5-to-1.
For the week, the Dow fell 1.8%, the S&P 500 lost 1.5%, and the Nasdaq was off 1.8%.
Despite the sharp decline that is now close to a full “correction,” the CBOE Volatility Index (VIX) has been relatively complacent (see Nov. 12 Daily Market Outlook). This indicates that even though buyers entered the market on Friday, there is still an unusually low level of concern among options traders, and that is not bullish since the VIX is a contra-indicator.
The breakdown at 1,403 rendered an initial target of 1,340. Interestingly, Friday’s low was 1,343 where significant buying appeared, which drove the close to almost the high of the day.
Conclusion: Friday’s rally turned stocks up and could be the signal that a near-term rally (within an intermediate downturn) is about to occur. This is supported by the low VIX numbers and also Thursday’s AAII report that showed a sudden jump in bearish sentiment and a drop in bullish sentiment. The bearish sentiment spiked to its highest level since August 2011. Since this is a contra-indicator, the reading is interpreted as near-term bullish for stocks.
Therefore, in the absence of a turnaround from the kumbaya of Friday’s fiscal cliff meeting between the White House and Congress, I expect the rally to continue as far as the resistance at the 200-day moving average at around 1,380 (red line).
I emphasize that this is not a prediction of a change in trend, but merely a dead-cat bounce that will force many shorts to cover prior to another test of the 10% downside target at 1,319.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.