The Nasdaq Composite surged past the 6,000 level on Tuesday — hitting new highs for the first time since early March — in a gapped move higher representative of serious, panicked buying pressure
The surge puts a dramatic end to a quiet two-month downtrend as investors burned off some of their post-election ebullience in calm, controlled fashion. Concerns focused on a lack of legislative progress from the Trump Administration, weakness in “hard” economic data points like retail sales, a renewed decline in crude oil prices and geopolitical tension.
While most of these remain in play — although President Trump is pushing hard on tax reform efforts this week — stocks had drifted enough that the situation was primed for a relief rally on any positive surprise catalyst. That was delivered on Sunday night after the first round of the French president election went as expected.
In the end, the Dow Jones Industrial Average gained 1.1%, the S&P 500 gained 0.6%, the Nasdaq gained 0.7% and the Russell 2000 gained 0.9%. Treasury bonds extended their recent weakness, the dollar was down, gold lost 0.8% and oil broke a six-session losing streak to gain 0.7%.
Breadth was positive, but less so than on Monday: NYSE advancers outpaced decliners by a 2.1:1 ratio. Volume was heavy, at 114% of the 30-day average. Materials and energy stocks led the way with gains of 1.6% and 0.9%, respectively. Yield-sensitive telecoms were the laggards, down 0.3%.
Alcoa Corp (NYSE:AA) surged 9.6% on a big earnings beat despite weaker revenue. Caterpillar Inc. (NYSE:CAT) gained 7.9% on an earnings beat driven by revenues 6% ahead of estimates — breaking a long string of declining sales for the heavy equipment make. Management raised guidance on improving demand.
And McDonald’s Corporation (NYSE:MCD) gained 5.6% on a top- and bottom-line beat on strong operating performance, expense trimming, and an unexpected increase in U.S. comp-store sales. AK Steel Holding Corporation (NYSE:AKS) lost 10.1% after reporting relatively flat shipments for the second quarter on a drag in automotive activity.
Here at home, fears of a government shutdown later this week diminished somewhat after President Trump reportedly softened his position on border wall funding. Focus remains on his tax plan to be unveiled tomorrow.
The market rally, while ferocious, lacks in a few areas. And that suggests it could burn itself out sooner than many realize.
Consider the gains of the last two days are narrowly focused in two main industry groups that tend to carry more “weight” in the broad market averages, and therefore are able to move the rest of the market around by the scruff of the neck: Financials and technology stocks.
But many other stocks are lagging behind: While the S&P 500 is within a hair of its record high, only 72.6% of S&P 500 stocks are in uptrends vs. 80% back in early March. And as I write this on Tuesday afternoon, only 64% of NYSE volume is going into advancing issues vs. 85% back in the middle of March.
Another problem is the fact that much of the intensity of the uptrend seems to be tied to a dramatic move higher in the euro-yen carry trade. Hedge fund types have frequently “sold” the Japanese yen in recent years to fund trades in dollar- or euro-denominated assets thanks to aggressive efforts by the Bank of Japan to devalue its currency.
Today, Reuters reported that officials from the European Central Bank are looking to hint at a reduction of cheap money stimulus efforts as soon as this summer thanks to the French election results. That is bolstering the euro in a major way, lifting risky assets in general as shown above.
Let’s also not forget that many of the factors that have kept stocks rangebound since March are in still in play.
Crude oil continues to trade heavily as market oversupply, bloated inventories, and ramping U.S shale production remain problems. President Trump’s tax proposal faces the prospect of resistance from both Democrats and Republicans in Congress.
And we’ve yet to see high measures of consumer confidence in recent months actually translate into increased economic growth as the Atlanta Fed’s GDPNow real-time estimate of Q1 GDP growth remains at just 0.5%.
And finally, Jason Goepfert at SentimenTrader notes that the last time stocks surged in a dramatic way — as measured by the Bollinger Band indicator — was last August, which marked a medium-term top for the market.
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.
