On Tuesday, the stock market had one of its biggest intraday reversals in the past four years.
The S&P 500 was off 1.2% by 10:36 a.m., but by the close, the most-watched index had gained 0.6%. The Dow Jones Industrial Average had a similar reversal, falling 1.2% (218 points) in the morning and ending the day up 0.5%.
The Nasdaq also staged a recovery from early losses, but its net change amounted to only 0.1% for the day after falling 1.8%.
Oil and other commodities, except those denominated in dollars, experienced similar reversals.
Gold for August delivery fell 1.8% to $1,152.60 an ounce, the lowest closing price in over three months. Silver fell to its lowest price in five years at $14.969, off 5%.
The U.S. dollar gained 0.4% versus a basket of currencies and rose the same against the euro, which closed at $1.1011.
Energy stocks rose 0.9% after falling 1.5% earlier in the day. Industrials rose 0.8%.
The Dow Jones Transportation Average rose 1.2% as bargain hunters raided the list of hard-hit rail companies and airlines.
Utility stocks jumped 2.5% as investors sought the higher yields and appreciation provided by many utility stocks versus bonds. The yield on the benchmark 10-year Treasury note fell to 2.23% from 2.28% on Monday.
In economic news, the trade deficit rose 2.9% in May. The May job openings and labor turnover survey indicated that job openings had a modest increase.
At Tuesday’s close, the Dow Jones Industrial Average gained 93 points at 17,777, the S&P 500 rose 13 points to 2,081, the Nasdaq gained 6 points at 4,997, and the Russell 2000 was up 1 point at 1,248.
The NYSE’s primary market traded over 993 million shares with total volume of 4.4 billion, the second highest volume of the year. The Nasdaq crossed 2.1 billion shares. On the Big Board, advancers outpaced decliners by 1.4-to-1, and on the Nasdaq, decliners led by 1.4-to-1.
The Dow Jones Industrial Average shows an outside reversal, in which the high and low of the day exceed the high and low of the previous day. The Dow also flashed a buy signal from my proprietary indicator, the Collins-Bollinger Reversal (CBR). MACD, another near-term bullish indicator, is also arching up.
Like the Dow Jones Industrial Average, the S&P 500 also executed an outside reversal and CBR buy, but of even greater significance. The index succeeded in closing above its 200-day moving average — a positive.
While the higher-quality indices executed a reversal and CBR buy, the Nasdaq failed to make the reversal and its MACD is flat. Also note that volume was lower than might be expected and that decliners exceeded advancers.
The Russell 2000 had no reversal and its MACD is negative. It is, however, close to attacking its 50-day moving average — a line of great significance — especially for traders. If you are trading, be aware that if the Russell 2000 pierces the 50-day moving average intraday and closes lower, you must exit since this would be a strong sell signal.
Conclusion
Although much was made of an outside reversal on the Dow and S&P 500, there is scant evidence to support the conclusion that this alone constitutes a major bullish event. It is almost always merely the result of extremely high volatility.
However, the high-volume buying on the Dow and S&P 500 is an indication that there is cash on hand at the institutional level. It is clear, though, that the big boys are only willing to make new purchases in higher-quality equities, while shunning stocks of mid and low quality with higher P/Es.
When the big money will only buy high quality, the market seldom has a strong follow-through. We remain cautious and nimble.
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.
