A new pattern of daily trading has emerged, and it’s the opposite of the one from just a few weeks ago. For the past six trading sessions, stocks have started off weak and ended strong.
Volume picked up yesterday as new highs for the year were made by many stocks. And the major indices were strong with new highs in the Dow Jones Industrial Average (DJI), the S&P 500 (SPX), the Nasdaq (NASD) and the NYSE Composite.
Yesterday, the Dow’s strength was focused on General Electric (GE), up 6.25%, American Express (AXP), up 3.43%, Bank of America (BAC), up 2.74%, and JPMorgan Chase (JPM), up 3.38%.
Gold futures continued to climb, and so did mining stocks. Recent weakness in the U.S. dollar has contributed to gold’s strength, and yesterday the dollar hit a 12-month low against the euro and a seven-month low against the yen.
Solid economic numbers helped fuel yesterday’s rally, too. The August consumer price index was higher than expected, industrial production for August was higher, and capacity utilization was slightly above estimates.
At the close, the Dow had gained more than 108 points to 9,792, the S&P 500 was up 16 points to 1,069, and the Nasdaq rose 31 points to 2,133.
The NYSE traded 1.6 billion shares with advancers ahead of decliners by 5-to-1. The Nasdaq traded 790 million shares with advancers ahead by slightly more than 2-to-1.
Crude oil for October delivery rose $1.58 to $72.51 a barrel, and the Energy Select Sector SPDR (XLE) gained $1.35 to $55.89.
December gold rose $13.90 to settle at $1,020.20 an ounce, and the PHLX Gold/Silver Index (XAU) rose $3.09 to $174.17.
What the Markets Are Saying
Now every major index and most secondary ones have not only made a new high for the year, but closed above the resistance line of the bull channel that has marked the current advance. Volume has increased along with obvious institutional buying, especially on the close.
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With the indices now in the open, there is every reason to expect this rally to continue since there was little or no support when the market broke down from this area in September and the first part of October a year ago. And the advance is broadening, taking with it virtually every sector and group.
Even with the internal indicators now overbought, momentum favors more buying. Sentiment is overbought, but during an explosive blow-out like this, sentiment can become even more overbought.
And while the public is certain that a pullback is in order, the CBOE Volatility Index (VIX), at just 23.69, is saying otherwise.
S&P noted last night that they see little resistance prior to 1,120 on the S&P 500 and no meaningful chart resistance appears before 1,200. The major indices have closed higher in eight of the last nine sessions, so the chances of many more moves of yesterday’s magnitude decease. But, as noted in my prior remarks, there is precedent for just such a move going back no further than the beginning of the last bull market.
On Friday, in our ChangeWave Inner Circle report, of last Friday, I observed “A bull channel pattern similar to this occurred in late November 2003, following a big run from the low of March 12, 2003. Just as technicians were looking for a correction, the Dow broke from the narrow trading channel, and within a month had gained another 600 points.”
There is always the possibility of a reversal and resulting pullback, so don’t hesitate to take a fat profit. However, a buying frenzy is now going on, and with commodities in demand and the dollar weak, stocks could move in a straight line up to our goals of Dow 11,300, S&P 1,245 and Nasdaq 2,300.
Today’s Trading Landscape
Earnings to be reported include: 3Com Corp. (COMS), Carnival Corp. (CCL), Cintas Corp. (CTAS), Discover Financial Services (DFS), FedEx Corp. (FDX), IHS Inc. (IHS), Palm (PALM), Pier 1 Imports (PIR), Somanetics Corp. (SMTS) and Zale Corp. (ZLC).
Economic reports due: housing starts (the consensus expects 600,000), jobless claims (the consensus expects 575,000), DJ-BTMU U.S. Business Barometer, Philadelphia Fed manufacturing survey (the consensus expects 8), and EIA natural gas inventories.
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