The slow, grinding advance continued on Wednesday, with the Nasdaq Composite once again moving to within reach of the record high it hit just the day before. The composite gained 8.56 points, or 0.14%, to end the session at 6129.14. The S&P 500 didn’t fare quite as well, only gaining 2.71 points, up 0.11%, to close out Wednesday’s trading at 2,399.63. Still, it’s also within sight of its record high of 2,403.87 hit on Tuesday as well.
Energy stocks led the way on Wednesday, gaining 1.29% thanks to crude oil’s 3% advance to a price of $47.51 per barrel. After a long-tailed capitulation bar on Friday, the bullish follow-through this week has been not only convincing, but on healthy volume. Industrial stocks were the laggards, but even so, they weren’t horrifyingly weak. The average industrial name only lost 0.09% of its value on Wednesday.
Interestingly, the day’s biggest individual movers didn’t come from either sector. Snapchat parent company Snap Inc (NYSE:SNAP) saw its stock lose 25% of its value following dismal Q1 results, and Nvidia Corporation (NASDAQ:NVDA) soared 17.8% on its outstanding first quarter numbers.
The unlikely rally for the S&P 500 has now advanced 15.1% since the early November low. Though arguably overdue for a corrective move after six months of mostly uninterrupted gains, stocks have had no problem tacking on more gains, with the bears seemingly never questioning the advance’s sustainability. Certainly not on Wednesday anyway.
For the NYSE, advancers exceeded decliners at a rate of 1.86 to 1.0. Up volume was better than down volume by 3.0 to 1.0. The NASDAQ wasn’t quite as firm, though healthy all the same. Its advancer/decliner ratio was 1.25/1.0, and its bullish volume was 1.36 times as strong as its bearish volume. Overall volume was up yesterday, for a second day in row, suggesting this rally is actually gathering new participants.
It’s hardly the ideal rally. The VIX is not just low … it’s dangerously low. And, the S&P 500 still has not one but two unfilled gaps from late last month that could still be serving as a drag on the bullish undertow.
Yet, meltups can and do happen, and this setup is such a candidate. That is, as unreasonable as it may seem, a move above 2,402 for the S&P 500 could spur another wave of buying from a trading crowd that’s proven more than once it’s not concerned about frothy valuations.
With all of that being said, it’s still the Russell 2000 Small Cap Index that will likely offer the best clues as to the market’s true direction here.
Small caps have been oddly lackluster of late, trailing large caps since December. Things have gotten slightly better this week, with the Russell 2000 finding support at its 20-day moving average line to log a little bit of progress. That was only a bit of pushback from the early May pullback though. While the index is up since the early April lull, it’s still mostly stuck in a new sideways range between 1390 and 1415.
Perhaps this week’s bullishness is laying the foundation at 1,390 to set up a breakout thrust. We won’t know until we see what happens at 1,415. At the very least though, the Russell 2000 is above 1390 rather than below it. That’s a fair start.
The problem remains, of course, the market’s wild valuation. The S&P 500’s current trailing P/E is 21.5 … well above the usually palatable norm.
Conclusion: Just so there’s no confusion, the bulls have the wind at their backs. There’s no nearly enough fundamental justification for higher highs right now, but that doesn’t matter. As Ben Graham put it, in the short-term, the market is a voting machine. Investors are saying they’re bullish on the headlines and rhetoric by buying stocks with real dollars. Never mind the fact that they’ve been doing it almost every day since early November, and have worked stocks into quite the frothy valuation. Assuming they’ll continue to ignore reality in the event of yet-another break to new highs, there’s no reason not to expect some nice follow-through.
All the same, know that any breakout thrust is still going to be rolling on borrowed time. Eventually, the market will become a weighing machine and force a pretty big wave of profit-taking. Let’s just hope the new lines in the sand are much higher by the time that happens. For the Russell 2000, that ultimate floor is around 1,333, where the 200-day moving average line will soon be. For the S&P 500, it’s 2,322.
First things first though. As of right now (and barring any unforeseen political ugliness), investors are looking for a reason to stage a bullish breakout.
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.
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