The Dow industrials had their second triple-digit up day on Tuesday, and the other major averages closed higher as well. The press attributed the gains to the expectations of positive comments about U.S. economic growth at today’s Fed policy meeting.
In the past, however, such talk of economic growth was coupled with reducing Fed stimulation, and the word “taper” is now being applied to the process. In the past, any hint of a scaling back of quantitative easing has resulted in a market sell-off. Investors want to know what makes “taper” different from “a gradual cutback” in the purchase of bonds by the Fed.
Small-cap stocks were the focus of buyers on Tuesday. The Russell 2000 small-cap index rose to a new high, up 1.2% versus the Dow industrials’ 0.9% gain.
At the close, the Dow Jones Industrial Average gained 138 points at 15,318, the S&P 500 rose 13 points to 1,652, and the Nasdaq jumped 30 points to 3,482. The NYSE traded 646 million shares and the Nasdaq crossed 371 million. On both the Big Board and Nasdaq advancers outpaced decliners by over 2-to-1.
The chart of the Russell 2000 shows focused buying directed at the small-cap stocks. The break from a two-month consolidation from March to May resulted in a run to an intraday high of over 1,000 on May 22.
But talk of a Fed cutback in their monthly bond purchase plan reversed the advance with a Key Reversal Day (see May 23 Daily Market Outlook). This is usually a negative development; however, instead of a sell-off, buyers have formed an inverse head-and-shoulders with a neckline at about 1,003.
Our internal indicator, the Collins-Bollinger Reversal (CBR), has issued two buy signals, and the well-regarded MACD appears on the verge of triggering a buy signal as well.
Conclusion: Should the Russell 2000 close above the neckline of the inverse head-and-shoulders formation at 1,003, the target for the index would be 1,042 and the rush to buy small caps would be on.
But investors should also be impressed with the broad-based advance represented by the other indices. On Monday, each of the major indices closed above their respective 20-day moving averages, which during all of June has marked the top of a very narrow trading range.
The bull is on the move, apparently nudged along by the word “taper,” which means, “a gradual cutting back.” The wording of today’s Fed announcement will be examined as thoroughly as Alan Greenspan’s famous warning in the 1990s of “irrational exuberance.” Perhaps we may even get a definition of the term as applied to Fed policy.
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.