Beware: Dead Cat Bounces Don’t Last Long

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Last week ended on a brighter note following a slow start Friday with an early high-volume sell-off.

The initial selling was caused by a weak September jobs report. Nonfarm payrolls for September increased by 142,000, well below the 205,000 projected. And August’s jobs number was revised down to 136,000 from 173,000. This resulted in speculation that the Federal Reserve may not raise interest rates this year.

The intraday reversal was triggered as higher oil prices led to buying in energy and materials stocks. Crude rose 1.8% to $45.54 a barrel after weekly data showed the U.S. rig count fell to a five-year low. The energy sector led the way higher, gaining 4.1%.

Gold jumped 2.1% to $1,137.10 an ounce. The yield on the benchmark 10-year Treasury note fell to 1.99% from 2.04% on Thursday. And the U.S. dollar fell 0.2% against the euro, which closed at $1.1216.

At Friday’s close, the Dow Jones Industrial Average gained 200 points at 16,472, the S&P 500 rose 28 points to 1,951, the Nasdaq jumped 81 points at 4,708, and the Russell 2000 was up 17 points at 1,114.

The NYSE Composite’s primary exchange traded 1.1 billion shares with total volume of 4.3 billion shares. The Nasdaq crossed 2.2 billion shares. On the Big Board, advancers outpaced decliners by 2.9-to-1, and on the Nasdaq, advancers led by 2.2-to-1.

For the week, the Dow Jones Industrial Average rose 1%, the S&P 500 gained 1.1%, the Nasdaq was up 0.5%, and the Russell 2000 fell 0.8%.

NYSE Composite Chart
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Chart Key

If Friday’s intraday reversal was genuine, I would have expected to see buys signals from my proprietary indicator, the Collins-Bollinger Reversal (CBR). Instead, virtually every chart looks like the broad-based NYSE Composite.

Many indices, including the Dow Jones Industrial Average, Dow Jones Transportation Average and S&P 500, broke down from a bearish ascending wedge. And even though the NYSE Composite broke up from a neutral pennant, it quickly reversed back down, confirming the true direction of the market.

Conclusion

Some investors may be asking, “If stocks are headed lower, why the big rally on Friday afternoon?”

First, the market was very oversold. Second, the market was very oversold at a time when institutional investors traditionally receive an avalanche of cash.

This influx of cash on the last day of a month — and I would point out especially the last day of a quarter or fiscal year — was recently highlighted by the Stock Trader’s Almanac. It states that the last day of a month and the first four days of the next month beat the averages. According to the study, this phenomenon is relatively new (since 1982) and the result of front-running the inflow of cash from 401(k), IRAs and other plans. The Stock Trader’s Almanac also saw a mid-month increase in buying because some retirement plans also receive mid-month distributions.

So there you have it: Even a dead cat needs some food to fuel a bounce. But dead cat bunces don’t last long, so use it as an opportunity to raise cash or short stocks.

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/2015/10/daily-market-outlook-dead-cat-bounces-dont-last-long/.

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