On Friday, the Dow rose to within 75 points of its all-time closing high after reversing from an opening loss of more than 100 points. The lower opening resulted from weaker-than-expected economic reports from China and Great Britain. But later in the day, a report indicating that the U.S. factory sector expanded more than expected trumped the China report, and stocks turned up. Also, the University of Michigan’s consumer sentiment index scored its highest level since November, and that was a pleasant surprise.
The only piece of bad news was the automatic budget cuts (sequestration) that kicked in as a result of the inaction of the White House and Congress, but it seemed to have little impact on the stock market.
At the close, the Dow Jones Industrial Average was up 35 points to 14,090, the S&P 500 gained 4 points at 1,518, and the Nasdaq rose 10 points to 3,170. The NYSE traded 743 million shares and the Nasdaq crossed 445 million. Advancers outpaced decliners on both major exchanges by about 1.2-to-1. For the week, the Dow gained 0.6%, the S&P 500 was up 0.2%, and the Nasdaq rose 0.3%.
The S&P 500 broke above the resistance at 1,515, which now makes that the closest support line. But the trading range is still tightly squeezed with support at 1,500 and resistance at 1,531. The challenge now is to successfully attack the high at 1,531.
The Dow industrials popped to a five-year closing high but its trading pattern is still defined by a bearish horn, and within the horn is a key reversal day — not the best of formations from which to expect a breakout. But MACD is close to a buy signal, and a pop from the horn could also result in a positive signal from this internal indicator.
The Russell 2000 small-cap index is restricted by a narrow band with support at 895 and resistance at 915. In a market that should be rewarding “risk-on” positions, this index, along with the Nasdaq (see Feb. 28 Daily Market Outlook), is surprisingly weak. MACD is oversold but meandering sideways, and the intermediate trendline has been broken.
Conclusion: The first-of-the-month syndrome, which in January and February resulted in big gains for the major indices, fizzled on Friday. The small gains were accompanied by only average volume, whereas in January and February, big triple-digit gains were accompanied by higher volume and breadth.
Like the dog chasing the truck who didn’t know what to do with it when he caught it, institutions received new piles of cash from IRAs and pension funds but acted confused as to where to put it to best use. Then came the answer, “Ah yes, I’ll plop some in the blue chips — no one can criticize me for that.” Up went the Dow industrials to a five-year high.
And so, after the best start in many years, the broad-based S&P 500 is plodding along more slowly, and the stocks that usually draw attention at the cusp of a breakout (small caps and midcaps) are being ignored. It is sometimes more difficult to do nothing, but that is what is called for until the market reveals its next short-term direction.
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.