Stocks rallied on a broad front Wednesday with the Dow, S&P 500 and Nasdaq taking back all of Tuesday’s losses. Only the small-cap stocks lagged, but even the Russell 2000 rose 0.5%.
The minutes from the Federal Reserve’s April meeting were expected to be a highlight of the day, but there was little in the way of new information. There was a general discussion of an eventual rate hike but no mention of timing. It was clear that no immediate major policy changes were considered.
According to FactSet, the S&P 500 is trading at 15.1 times next year’s earnings, which is above its 10-year average of 13.9. Q1 earnings came in above analysts’ forecasts — up 2.2% versus an expected decline of 1.2%.
Salesforce.com (CRM) fell 5.1% after reporting better-than-expected earnings when its future bookings were questioned by analysts. American Eagle Outfitters (AEO), PetSmart (PETM) and Lowe’s (LOW) all ended the day down following disappointing earnings. But Target (TGT) gained 1% after missing estimates, and Tiffany & Co. (TIF) jumped 9.2% after a solid earnings report.
At Wednesday’s close, the Dow Jones Industrial Average rose 159 points to 16,533, the S&P 500 gained 15 points at 1,888, and the Nasdaq added 35 points at 4,132.
The NYSE’s primary market traded 587 million shares with total volume of 2.7 billion shares. The Nasdaq crossed 1.7 billion shares. On the Big Board, advancers outpaced decliners by 1.9-to-1, and on the Nasdaq, advancers were ahead by 1.5-to-1.
The broad-based NYSE Composite is often a good indicator of future action in the market.
Note the pullback following new highs in early May, and the subsequent restricted trading zone between its 50-day moving average at 10,510 and just above the 20-day moving average at 10,606. Prices are also being squeezed by the rising intermediate trendline, which intersects the 50-day moving average. MACD is in the bear camp and momentum is slipping — signs of weakness.
The Nasdaq is showing improvement, but its near-term trend is still down. It is also trading in a narrow range, but not as narrow as that of the NYSE. Support is at the 200-day moving average at 4,009, and resistance is at the 50-day moving average at 4,151. Momentum improved Wednesday, and MACD is just barely in the bullish camp.
Conclusion: So far, May has been sideways for all the major indices except the small-cap Russell 2000, which is fighting to stay above support at 1,080 and avoid a potentially fatal breakdown (see yesterday’s Russell 2000 chart).
Wednesday’s volume, at a puny 2.7 billion shares of total NYSE volume, does not support a breakout. And momentum in all of the indices has been negative, but not significantly so.
In other words, there are no strong indications for either a breakout or breakdown yet. However, the lack of follow-through and negative momentum on the NYSE Composite are troubling. As is its inability to follow through on new highs made just two weeks ago.
We’ll stick with our 60/40 split on equities versus cash. But if an upside break doesn’t occur soon, “sell in May and go away” may have to be considered a valid strategy.
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.