Don’t Get Too Giddy Over That Dead-Cat Bounce

by Sam Collins | August 5, 2014 4:00 am

Stocks had their best day in two weeks on Monday, with seven of the 10 S&P sectors closing in the black. All told, the S&P 500 finished up 0.7% and the Dow Industrials gained 0.5%.

The session opened lower, but at mid-morning the S&P 500 rebounded on light volume and rose on steady demand for the remainder of the day. The worries that accompanied Friday’s session — especially the fear of an interest- rate increase this year — were put on the back burner by soft economic numbers. The CBOE Volatility Index (VIX) fell 12%.

Small-cap stocks rebounded, with the Russell 2000 up 0.9%. And cyclical sectors outperformed defensively oriented groups like utilities, which fell 0.6%. Energy, up 1.6%, led all other sectors — but it , like the small-caps, was hard hit last week.

Berkshire Hathaway (BRK.a[1]) gained 3.1% following record earnings. FactSet reported that Q2 earnings have increased by about 7.7% year-over-year.

At the close the Dow Jones Industrial Average rose 75.91 points to 16,569.28, the S&P 500 gained 13.84 points to close at 1938.99, and Nasdaq gained 31.25 at 4383.89. The Russell 2000 jumped 9.96 points to 1124.82. The NYSE total volume slightly exceeded 3 billion shares, and Nasdaq crossed 1.7 billion shares. Advancers outpaced decliners on both exchanges by about 1.6-to-1.

Despite the outperformance of small-caps, yesterday’s rally had all the hallmarks of a dead-cat bounce. The gap down from 1142 to 1137 from the index’s 200-day moving average marks a serious violation of a major inflection point. But the open gap and a close at the high of the day is a short-term positive that suggests that a rally is likely to continue until the gap is closed — when buyers hit the overhead at the 200-day moving average, now at 1145.

Yesterday, Nasdaq proved the power of the support line at 4351 by reversing from it and closing over the 50-day moving average at 4368. Thus, the line at 4351 becomes a major inflection point, which if violated along with the 50-day moving average would indicate a lower low — and signal a change in trend for this important index.

Conclusion: Despite better action from the “soldiers” of Nasdaq and the Russell 2000 — especially compared to continued sluggish behavior from the “generals” of the Dow — the generals must carry some weight if the broad market is to reverse from last week’s shock. And even though the Dow industrials did jump 76 points on Monday, it has a long way to go to make up for crushing its support line at 16,735 (see Monday’s DJIA chart[2]).

Yesterday’s rally lacked volume and breadth, and so the pressure is on the bulls to turn around what appears to be an important intermediate breakdown. And to accomplish that they must reverse the DJIA before it slices through the all-important 200-day moving average at 16,328. It’s looking more and more like a very uncomfortable summer.

Source URL: https://investorplace.com/2014/08/dead-cat-bounce/

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