Stocks posted a nice rebound Thursday from a deeply oversold condition after — surprise, surprise — investors were encouraged by vague but reassuring words from a Federal Reserve official.
Repeating his performance from late 2014 — when comments about more Fed bond-buying stimulus reversed an Ebola-driven selloff — St. Louis Fed President James Bullard’s comment about crude oil forcing the Fed to rethink its policy ignited a powerful buying impetus.
Specifically, he said that the decline in crude may impact inflation expectations and make it harder for the Fed to reach its 2% inflation target. This implicitly hints that it may be awhile before short-term interest rates are raised again as they were in December for the first time since 2006.
As a result, the Dow Jones Industrial Average went 1.4% higher, the S&P 500 Index gained 1.7%, the Nasdaq Composite added 2% and the Russell 2000 ended with a 1.5% gain.
Further, treasury bonds were mixed, the dollar strengthened, gold lost 0.9% and crude oil gained 2% to close at $31.10 a barrel.
Bombed out energy stocks led the way high, gaining 4.5% as a group with Exxon Mobil Corporation (NYSE:XOM) up 4.6% and Chevron Corporation (NYSE:CVX) up 5.1%. Beleaguered Mexican purveyor Chipotle Mexican Grill, Inc. (NYSE:CMG) gained 6.1% after being upgraded by analysts at CLSA on belief an “all clear” from the CDC is imminent after recent bouts of food-borne illness.
Elsewhere, GoPro Inc (NYSE:GPRO) lost 14.6% on a negative fourth-quarter preannouncement and revenue guidance 16.5% below Street estimates. Management cited softer sales of action cameras. Best Buy Co Inc (NYSE:BBY) lost 9.7% after reporting holiday comp-store sales down 1.2%, and guided domestic Q4 revenue down 1.5% vs. prior flattish guidance.
Fiat Chrysler Automobiles NV (NYSE:FCAU) dropped 4.2% on reports of a civil racketeering suit with two U.S. dealerships alleging the company attempted to inflate its monthly sales figures by offering money in exchange for reporting unsold vehicles as sold — another example of creative, but totally illegal, practices by an automaker (I’m looking at you Volkswagen).
Attention now turns to a number of major bank earnings reports scheduled for the next few days. JPMorgan Chase & Co. (NYSE:JPM) kicked things off with a fairly positive report, beating on both revenues and earnings thanks to higher net interest margins. But trading revenue was a drag.
With sentiment so bombed out, I recommended Wednesday that subscribers book short-side/long-volatility profits as the market looks primed for an oversold bounce. These included a 515% gain in the Jan $17 Bank of America Corporation (NYSE:BAC) puts recommended on Dec. 31 and a 379% gain in the Jan $110 Apple Inc. (NASDAQ:AAPL) puts recommended on Dec. 17.
Indeed, the AAII Investor Sentiment Survey shows that bullish sentiment fell 4.3 points to 17.9% last week, well below the long-term average of 38.7% and registering the lowest level since April. Bearish sentiment was at its highest since 2014.
Also, the Bespoke Investment Group notes that the S&P 500’s ten-day advance/decline line fell below the $2,200 level — the eighth-worst reading going back to 1990.
I’m not yet ready to recommend any new long positions just yet, preferring to hold cash for now.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
