Stocks Post Historic Rebound on Stimulus Hopes

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U.S. equities posted their best one-day gain since 2011 on Wednesday after New York Federal Reserve Bank President William Dudley lowered expectations for a September interest rate hike, noting that the evidence was “less compelling” given recent financial market turmoil. This was exactly the reassurance that stimulus-addicted bulls were waiting for, building on the interest rate cuts from the People’s Bank of China on Tuesday.

With the flow of monetary morphine seemingly secure for another month, buyers hit the tape aggressively into the closing bell resulting in the largest intraday reversal since October 2008.

It’s worth remembering, however, that there are risks to a delayed rate hike as well, including a lack of a press conference in October, end-of-year volume issues in December, and the risk further delays will only magnify any eventual post-hike market volatility.

But for now, those concerns were set aside thanks to a strong and overdue mean-reversion rebound.

In the end, the Dow Jones Industrial Average gained 4% to cross back over the 16,000 level, the S&P 500 gained 3.9%, the Nasdaq Composite gained 4.2%, and the Russell 2000 gained 2.5%.

dow jones chart

Safe havens and commodities were pressured. Gold lost 1.2% while crude oil lost 0.9% to close at $38.95 a barrel on production data. T-bonds were hit hard, with the iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT) losing 2% on increased risk appetites as well as chatter that the Chinese are selling their reserve holdings to compensate for recent currency market volatility. The U.S. dollar gained 0.7% to return to Friday’s trading range.

On a technical basis, a short-term bounce was overdue: The Bespoke Investment Group noted that the S&P 500 ended Tuesday more than four standard deviations below its 50-day moving average for the third straight session — something that hasn’t happened since 1940.

For this reason, I recommended Edge subscribers close out their position in the VelocityShares Daily 2x VIX Short-Term ETN (NASDAQ:TVIX) for a month-to-date gain of 144%. Overall, their holdings are up nearly 90% for the month vs. a 7.3% decline for the S&P 500. Since inception in December 2010, subscribers enjoy a cumulative return of 118% vs. a 65.5% rise in the S&P 500 — proving that contrarianism mixed with patience can really pay off.

Momentum favorites in technology and biotech led the way, with technology gaining 5.3% as a sector while healthcare rose 4.3%. Apple Inc. (NASDAQ:AAPL) gained 5.7% while Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) rose 7.7%. Netflix, Inc. (NASDAQ:NFLX) rose 8.5%. And the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) gained 5.1%.

What happens next will depend on confirmation of Dudley’s comments from other Fed officials heading into this weekend’s Jackson Hole, Wyoming, symposium, the strength of any follow-through in Asian markets with the Shanghai Composite closing below the 3,000 level last night, and whether any strong economic data point (such as tomorrow’s Q2 GDP growth revisions) undermines the “no hike” for September consensus that drove today’s bounce.

dow jones

Before you pop the champagne, remember: Anyone who bought stocks since late 2013, on average, is underwater. That makes the rebound vulnerable to “sell the rip” behavior as scared investors use any rally to exit losing positions.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/08/stocks-post-historic-rebound-on-stimulus-hopes/.

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