A whiff of spring arrived at Broad and Wall Streets yesterday when better-than-expected retail sales data and more good news from a key bank led to a broader-based rally. It was the third day in a row that stocks were up, with total gains of almost 11% for the best performance on the S&P 500 (SPX) since Nov. 25.
Despite a 9,000 increase in weekly initial jobless claims — which was worse than expected — and continuing claims of 5.32 million, the market was more focused on the bright spots in the financial sector.
General Electric (GE) had its credit rating cut by Standard & Poor’s but it was only reduced to AA+ from AAA, so the stock rallied 12.72%. And Bank of America (BAC) said that it was profitable for the first two months of the year and didn’t think that any more government capital will be needed. BAC rose 18.66%.
At the close, the Dow Jones Industrial Average (DJI) had gained 240 points to 7,170, the S&P 500 (SPX) gained 29 points to 751, and the Nasdaq (NASD) rose 54 points to close at 1,426.
The New York Stock Exchange traded 1.8 billion shares, with advancers ahead of decliners by almost 11-to-1. The Nasdaq traded 887 million shares with advancers ahead by almost 5-to-1.
Crude oil (April contract) rose more than 11%, gaining $4.70 and closing at $47.03 a barrel, while the Amex Energy SPDR (XLE) gained $1.22 at $41.88. Crude appears to be forming a huge saucer with support just under $40. A pop above $50 would establish the bottoming pattern.
Gold (April contract) gained $13.30, closing at $924 an ounce following oil and other futures higher. The PHLX Gold/Silver Index (XAU) gained $4.50 to $120.44. Gold futures are still in an uptrend with support on a long-term trend line at $875. The top of the trend’s channel is more than $1,050.
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What the Markets Are Saying
On Thursday, the S&P 500 (SPX) closed above the 20-day moving average at 745.10 for the first time since Feb. 9. And it closed above the resistance line drawn from the November low at 741.02 for the first time since Feb. 13.
Volume for each of the days of higher prices increased to more than 1.8 billion shares on the NYSE, and that is a higher-than-average volume for any month this year (1.6 billion average). But volume has been picking up since the breakdown on Feb. 27 at SPX 740 when more than 2 billion shares traded.
With a reflex rally now underway, the question is: “How far can it go?”
The close on Thursday at SPX 750.74 poked prices into the resistance zone from 740 to 800, where the index encountered the first solid pocket of potential selling at 742-780. Now with momentum, the Moving Average Convergence/Divergence (MACD), and the CBOE Volatility Index (VIX) indicating that the rally should continue, that pocket is a good test for the bulls. Average volume at that level was about 1.9 billion shares, which is just about what the NYSE has produced daily in each of the last three days.
But even if the current drive is successful, after that there is the enormous overhead created during four months from 800 to 900. If buyers are able to surmount the immediate obstacles and establish a base, the chances of a sustained move are slim and the likelihood of an extended back-and-forth type of trading are very high.
This rally came off of the most oversold numbers seen in a long time. Some made new records, such as the American Association of Individual Investors (AAII) bearish reading of more than 70.27% on March 5. The latest AAII bearish number on Wednesday was 54.47%, which is the lowest in four weeks. In other words, the public is becoming less bearish.
And it is no wonder that the public is getting on board. Seldom have I seen such cheerleading from the TV financial press. You may remember that just a couple of weeks ago, they started whooping it up only to crawl back dejected when prices broke through the double bottom at SPX 740.
The evidence, so far, is that the rally is a bear reflex run-up based on what was a deeply sold-off market. Like a coiled spring, energy is released when the slightest bit of pressure is eased. And that’s what happened this week with the release of better earnings for some of the beaten-down banks and better retail sales.
But the chances are high that the spring is weak and, after a short run, the bear will still be with us.
Today’s Trading Landscape
Earnings to be reported include: AEP Industries, Allianz SE, American Shared Hospital Services, Capital Gold Corp, Compass Diversified Holdings, Eni S.p.A., EV Energy Partners LP, Furmanite Corp, GeoMet, Halozyme, Hooper Holmes, NACCO Industries, NPS Pharmaceuticals, Piedmont Natural Gas, Reis, Sun Communities, and Universal Insurance Holdings.
The following economic reports are due: January trade balance (the consensus expects negative 37 billion), February import prices (the consensus expects negative 0.8%), and Mid-March Reuters/University Michigan Sentiment Index (the consensus expects 56).
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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.
