With a third consecutive daily gain under our belts, the bullish case has been seriously bolstered. It couldn’t have come at a better time either. After two relatively nasty bearish days last week, even the most convicted of bulls were starting to wonder if stocks were vulnerable to a pullback. Some well-timed economic news, however, gave the market just the excuse it needed to solidify the budding uptrend.
The economic news was a combination of May’s housing starts and building permits, along with last month’s consumer inflation figures. None of it could be considered “good.” Housing starts fell from a pace of 1.071 million in April to 1.001 million in May, while permits issued slumped from 1.059 million to a pace of 991,000. Meanwhile, consumer inflation edged a little higher from April’s annualized growth rate of 2% to 2.1% for May. It’s the highest inflation rate we’ve seen since October of 2012.
As for how those numbers could spark bullish interest in stocks, investors widely assumed the data will encourage continued stimulus from the Federal Reserve — if not in the form of pushing cash into the economy via bond purchases, then at least by keeping interest rates suppressed and subsequently keeping money cheap.
While convention says a greater number of cheap dollars should exacerbate the inflation problem, the market is saying — i.e., “voting” via stocks — the Fed should continue to be as accommodative as possible going forward until inflation becomes a real problem, which would likely be above the 3% mark.
For better or worse, Wednesday FOMC meeting should provide some clarity on how, or even if, Fed Chair Janet Yellen and the other Fed governors are worried about growing inflation.
At Tuesday’s close, the S&P 500 advanced 4.2 points (0.22%) to 1941.99. The Nasdaq Composite added 16.1 points (0.37%) to 4337.23, and the Dow Jones Industrial Average rose 24.5 points (0.16%) to 16,808.49.
The market’s breadth and depth levels looked healthier than the indices’ modest gains did. The Big Board’s advancer/decliner ratio was 1.63-to-1, while the Nasdaq’s came in at 2.15-to-1. The NYSE’s up/down volume ratio reached 2.18-to-1, while the Nasdaq posted 2.72-to-1.
It was admittedly not the outcome yours truly was expecting a week ago, but the charts don’t lie. The bulls are back in charge, having never suffered the more significant correction that would, frankly, do the market some good by sloughing off worries about the overbought condition.
The Dow Jones Industrial Average has formed the most sound recovery so far, bumping into its 20-day moving average line with Thursday’s low, and riding that near-term moving average line upward ever since.
chart of the Nasdaq Composite, however, that could put all e indices back into high gear. The Nasdaq is only 35 points away from multi-year highs. Although perhaps more overbought than the bulls would like, the index has rallied through more intimidating overbought situations. If the 4,372 line is hit and/or cleared, it may well become the trophy the bulls can hoist over their heads and use to really draw a buying crowd
Conclusion: The Nasdaq’s pending move above 4,372 could potentially double the odds of more upside unfurling over the course of June and into early July. The Dow’s MACD lines are also within reach of a new bullish divergence, which would really cement the current buying effort into place. While valuation issues may limit how long and how far any breakout is allowed to take the indices, the technical barometers are once again pointing in a bullish direction. Color me surprised.
Realistically, any rally effort would be out of gas again within three weeks or so, setting up a lull or even the long overdue correction. Between now and then though, stocks appear willing and able to defy the odds and remain in their uptrend.
The caveat is, of course, geopolitical turmoil could flare up with or without warning, and it would take next to nothing for traders to start seeing the glass as half empty rather than half full. Keep a short leash on everything at this point.
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.