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Don’t Get Too Excited About the Market’s Gains

Lower quality stocks led the advance; near-term trend remains down


The S&P 500 rose 0.38% Tuesday, breaking a four-day losing streak. But the market was led by the small-cap stocks with the Russell 2000 up 1.51% after falling for five consecutive sessions.

Better earnings from the retail sector, including Best Buy (BBY), TJX Companies (TJX) and Urban Outfitters (URBN), contributed to the gains. Homebuilding stocks bounced as well, with the iShares Dow Jones US Home Construction (ITB) up 3.1% and most of the major builders up as much as 4%.

At Tuesday’s close, the Dow Jones Industrial Average was off 8 points at 15,003, the S&P 500 rose 6 points to 1,652, and the Nasdaq gained 25 points at 3,614. The NYSE traded 634 million shares and the Nasdaq crossed 311 million in a light-volume session. Advancers led decliners on both major exchanges by 2.7-to-1.

SPX Chart
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Chart Key

The S&P 500 regained a small part of the four-day decline that began on Aug. 14 with a gap down from its 20-day moving average. But Tuesday’s bounce failed to close above the 50-day moving average, and so this senior index must be considered negative for the intermediate term.

A close under the intermediate trendline at about 1,650 would confirm the downtrend while a solid advance with higher volume would turn the index positive again.

RUT Chart
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The Russell 2000 small-cap index stayed under its 50-day moving average for just one day. Note the oversold MACD and a slight hooking up from the fast line (red).

The current bounce could even challenge the breakaway gap at 1,038-1,045. But the head-and-shoulders breakdown will be difficult for traders to overcome.

Conclusion: These charts vividly illustrate the market’s current dilemma. As in July and part of August, the leading stocks are of lower quality, not the stuff of dynamic bull markets. In fact, on Tuesday, the blue-chip Dow 30 closed down while lower quality stocks rallied.

Fed talk could support a continuation of the rally, but the die is cast and the near-term trend is down with the intermediate-term trend hanging by a slim thread. Continue to sell into strength.

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.

Article printed from InvestorPlace Media,

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