After two straight days of sizable losses and a week and a half of broad bearishness, the bulls — likely encouraged by a weakening U.S. dollar — finally fought back on Thursday.
While it was an impressive move that could serve as a foundation for a recovery, it’s far too soon to flip the switch back to bullishness. Traders are now mostly in a “show me” state of mind and will require evidence that this upswing is more than a dead cat bounce.
Indeed, when all was said and done, the U.S. Dollar Index only closed 0.2% lower at 99.24. It remains just under multiyear highs and is still far too strong to ease the currency-exchange burden proving to be a drag for so many U.S. companies that rely on foreign sales of goods.
Regardless of the longevity of the trend, financial and utility stocks led the way higher, up 2.2% and 1.9%, respectively. Energy stocks were the big laggards, down 0.6% as crude oil spot prices tumbled 2.3% to just over $47 per barrel.
The yield on the 30-year Treasury fell slightly, to 2.69%, marking the fourth day in a row rates on bonds have fallen after Friday’s spike. Gold finished a tad higher at $1,153.90 per ounce.
Retail spending slumped in February for the third month in a row. Overall retail spending was off 0.6%, while retail consumption not factoring in automobile sales fell 0.1%. Though the headlines and commentary painted a somewhat sour picture, what wasn’t made clear was the impact of abnormally low gasoline prices. Total spending on almost all other fronts last month was higher than year-ago levels.
At Thursday’s close, the Dow Jones Industrial Average advanced 260 points to 17,895, the S&P 500 gained 26 points at 2,066, the Nasdaq was up 43 points to 4,893, and the Russell 2000 rose 21 points to 1,237.
Advancers outpaced decliners by 7-to-2 on the Big Board, and the Nasdaq’s winners outnumbered losers 7-to-2.7. Volume was similarly bullish. The NYSE’s up volume was stronger than bearish volume by 7-to-2.7, and the Nasdaq’s up-volume/down-volume ratio was 6.5-to-3.3.
The S&P 500 firmly fought its way back above the 50-day moving average at 2,060. Aside from that, and acknowledging the sheer size of the gain — the biggest in about a month — there’s still not a lot to firmly suggest renewed bullishness is afoot.
MACD confirms the near-term trend remains bearish, and though nothing lasts forever, it’s unlikely this corrective move has fully run its course. Even at Thursday’s lowest point, the S&P 500 had still only pulled back 3.7% from its late-February peak.
The Nasdaq and Dow Jones Industrial Average charts look about the same and are equally unhelpful in terms of dropping tangible hints as to the market’s true direction. But a noteworthy divergence is becoming evident on the chart of the Russell 2000.
For those who check under the market’s hood on a regular basis, you’ll know small caps have been lagging the overall market for the past year. The Russell 2000 is up only 3.8% in the past 12 months while the S&P 500 has gained 10.6%. It may be time for a bit of market-cap rotation.
It’s a subtle hint, but it’s been a subtle hint we’ve seen from the Russell 2000 for the past several weeks. This index is finding support at its key moving averages and using them to make higher highs. In January, it was the 200-day. Earlier in the week, it was the 50-day. The same can’t be said of other indices.
Conclusion
A long-term view of the Russell 2000 suggests we may have only just now come out of a long-term consolidation, which means small caps could be poised to lead for much longer while large caps flounder. Bear in mind this small-cap strength won’t stave off any near-term market-wide weakness — it’s just a bigger-picture observation, though one with ramifications.
As for the near-term market, this is a time where the smart-money move is to wait and let other players tip their hand. The day looks bullish, but the tide is still bearish. A low under Wednesday’s low of 2,040 on the S&P 500 should open up another round of selling, but it would take a move all the way above the 20-day moving average at 2,094 to truly suggest the S&P 500 offered any trade-worthy upside at this point.
Waiting for the indices to wiggle out of this rut may not be a bold call, but it’s the right one.
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.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
