Even after some late afternoon profit-taking yesterday, the stock market made broad advances with big gains in gold, commodity producers, and other commodity-related companies. The catalyst for such a strong day in stocks was the surprising hike in interest rates by the Australia National Bank, taking their key lending rate to 3.25%, up 25 basis points.
Multinationals did especially well as the U.S. dollar plummeted. The Dollar Index fell 0.5% as investors moved into stocks that could provide a hedge against future inflation. The dollar fell 0.45% versus the euro, and was lower against every major currency except the British pound. Gold leapt to a new intraday high of $1,045 an ounce, and gold mining stocks provided some of the best returns of all equities on the board.
After the late round of profit-taking, an even later rally overcame most of the pullback, and stocks closed with a rush of buying. Financial stocks were victims of sellers following a strong showing on Monday. But, even so, the financial stocks closed with a 1.2% gain, and the overall market closed strong for the second consecutive day. The two-day run produced a gain of 2.9%, the best performance in over a month.
At the close, the Dow Jones Industrial Average (DJI) was up 132 points to 9,731, the S&P 500 (SPX) gained 14 points at 1,055, and the Nasdaq (NASD) rose to 2,104, up 35 points.
Volume on the NYSE was still low compared to most days with large gains, with just 1.2 billion shares trading. But breadth was broad as advancers outnumbered decliners by 4-to-1. The Nasdaq traded 729 million shares with advancers there ahead by more than 3-to-1.
As noted, the weaker dollar caused a rush to buy commodities, and so November crude oil closed at $70.88, up 47 cents. The Energy Select Sector SPDR (XLE) jumped $1.26 to $54.38.
But gold was the big winner yesterday, setting a new Comex most-active-contract record. December gold closed at $1,039.70, up $21.90, and the PHLX Gold/Silver Index (XAU) closed at $172.26, up $9.93, just shy of a new record closing high.
What the Markets Are Saying
With a low volume broad advance there is always the chance of a violent reactive round of profit-taking. But momentum is now so strong and breadth so deep that a serious reversal is very unlikely.
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Yesterday, buy signals were triggered by many of our internal indicators with the fast and slow stochastic and momentum giving the strongest. And Moving Average Convergence/Divergence (MACD) made a big turn up and is still very oversold, telling us of a strong likelihood of a continuing rush to buy.
The measure of options volatility, the CBOE Volatility Index (VIX), fell 1.14 to 25.70 following a monthly high of 29.56 on Friday — another indication that the rally will most likely continue.
However, if we get a blast out of the gate this morning with the indices close to the highs, traders may want to move some positions to cash and wait for another shallow pullback before putting it back to work. This is not to disparage the performance of stocks this week but only to protect against violent day-end profit-taking, which often accompanies low-volume, big-percentage up mornings.
However, a breakout through the high at S&P 1,060 would signal a quick run to at least 1,100. For longer-term investors it’s best not to run against the grain by taking small profits. Stick with your friend, the trend, which is decidedly up, and ignore the wags on TV. Yesterday they couldn’t party enough, while on Friday they were in the pits with predictions of massive gloom and doom while I focused on the oversold Relative Strength Index (RSI) and the trend that was and still is decidedly up.
Today’s Trading Landscape
Earnings to be reported include: Acuity Brands (AYI), Alcoa (AA), Costco (COST), Family Dollar Stores (FDO), Helen of Troy Corp. (HELE), Kayne Anderson Energy Development Co. (KED), Lindsay Corp. (LNN), M&T Bank Corp. (MTB), Mercantile Bank Corp. (MBWM), Monsanto Co. (MON), Ruby Tuesday (RT) and Wolverine World Wide (WWW).
Economic reports due: MBA purchase applications, EIA petroleum status report and consumer credit (the consensus expects $-8.5 billion).
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