Breakdown’s Cloud Still Hangs Over Market

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Stocks rallied Thursday for the second consecutive day. The S&P 500 jumped 2.4%, and the Dow Jones Industrial Average rose 2.3% as investors appeared encouraged by better economic reports and heavy buying by the Chinese government.

Oil prices had their biggest gain in six years, jumping over 10% with spot crude closing at $42.56 a barrel. Venezuela and Russia pushed OPEC members to arrive at a plan to stem the bleeding in crude oil prices.

The U.S. dollar rose against the euro, climbing 0.6% to $1.1245, and 0.9% against the yen.

But all was not roses on the NYSE Composite. A computer glitch kept hundreds of mutual funds and ETFs from being able to value their holdings. The focus of the problem was at the Bank of New York Mellon Corp (BK), which is the largest fund custodian in the world based on assets. According to The Wall Street Journal, the breakdown made ETFs more costly to trade, hindered investors’ ability to trade accurately and forced funds to scurry to price securities.

Economic reports were positive. Initial jobless claims for the week ending Aug. 22 fell to 271,000 versus expectations of 274,000. The second estimate of Q2 GDP resulted in an upward revision to an annual growth rate of 3.7% from 2.3%.

However, good economic news and a market rebound, along with zero global inflation, put a rate increase by the Federal Reserve back on the table. The yield on the U.S. 10-year Treasury note fell to 2.17%, down slightly from Wednesday.

At Thursday’s close, the Dow Jones Industrial Average gained 369 points at 16,655, the S&P 500 rose 47 points to 1,988, the Nasdaq was up 115 points at 4,813, and the Russell 2000 gained 21 points at 1,154.

Over 1.5 billion shares traded on the NYSE’s primary market with total volume of almost 5 billion shares. The Nasdaq crossed 2.4 billion shares. On the Big Board, advancers outpaced decliners by 8-to-1, and on the Nasdaq, advancers led by 3.4-to-1. More importantly, advancing volume exceeded declining volume on the NYSE by over 20-to-1.

Dow Jones Shanghai Index Chart
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Chart Key

This startling chart of the Dow Jones Shanghai Index shows a sell-off of over 40% in just under three months. Wednesday night’s rise of more than 5% is dwarfed by the overall decline and explains why China’s politicians are worried about the stock massacre and its global impact. The chart, however, does not show that the index almost doubled in just two years ending in June.

SPY Chart
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In Wednesday’s Daily Market Outlook, I noted SPDR S&P 500 ETF Trust (SPY) had held above October’s low and was overdue for a rally. We got that rally, and a gap at $203.90 to $202.92 may be a magnet for a further advance.

Yet, we dare not ignore the magnitude of the damage of the breakdown. The 50-day and 200-day moving averages were crushed, and the intermediate trendline at about $206 was demolished.

All of this damage was exacerbated by an enormous increase in volume. And buyers have not been able to overcome the level of volume that accompanied the selling from Friday through Tuesday. However, Thursday’s advancing volume at over 20-to-1 is encouraging.

Conclusion

The constructive price action of the past two sessions, with the Dow industrials registering their biggest percentage gains since late 2011, is a positive. But the breakdown was severe enough to place a cloud over the markets for a number of months.

Massive overhead on every index will probably thwart any hope of exceeding April’s high before year-end. And no amount of contrived purchases authorized by China’s government can overcome the inevitable direction of world markets.

As prices climb toward the charts’ overhead, take some short-term trading profits and prepare your lists of stocks to buy on a further test of the recent lows. Profit-taking, resulting in an accumulation of cash, can be used to purchase bargains. It is all part of a wise investment 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.


Article printed from InvestorPlace Media, https://investorplace.com/2015/08/daily-market-outlook-breakdowns-cloud-still-hangs-over-market/.

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