On Friday, stocks opened sharply lower, gapping down from the late selling of Thursday, and within minutes drove through the lows of the May 6 “flash crash” (or “glitch day”). But almost as soon as prices hit those prior lows, buyers rushed in to take advantage of bargains, especially in the financial sector, and heavy volume reversed the broad tape, ending the immediate slide in the market.
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The 3% sell-off on Thursday caused foreign markets to react with heavy selling overnight, and that was blamed for the lower opening of U.S. stocks on Friday. Despite the almost immediate turnaround, there was extensive damage done to equities both in the U.S. and foreign markets, and the Dow Jones Industrial Average (DJI) was down 4.02% for the week. And, for the year, the Dow is off 2.25%.
Some of the biggest U.S. banks led Friday’s rally, with JPMorgan Chase & Co. (NYSE: JPM) up 5.87%, Bank of America Corporation (NYSE: BAC) up 4.5%, and American Express Company (NYSE: AXP) up 3.1%.
Short sellers, focused on the financial sector, had apparently expected another deep sell-off, but when heavy buying volume entered the market early, the shorts rushed to cover, and that accelerated the rate of the advance.
By noon, the early buying had run its course, and by the close the major indices gave back most of the early gains. However, buyers, encouraged by the passage of a finance reform bill and by the early reversal up, appeared in the final minutes of trading and drove the Dow to a gain of 1.25% for the day.
Even though the Senate’s finance bill will curb many former practices of the banks, there was an accommodation with lawmakers taking away some of the most controversial items. And, as one investment officer said, “now we at least know the devil in the details.” Others seem to think that the harm done to financial stocks had already outweighed that done by the bill.
The broad market, aside from the financials, gained from Germany’s commitment to the European Union’s rescue package. And an investment officer at Victory Capital Management was quoted by the Wall Street Journal as saying, “You had a lot of pressured selling over the last week, but like most things, there’s a clearing price that tends to attract investors back to the market.” He also said, “The things plaguing Europe, they’re not small and it’s going to take a while to fix, but I just think investors are looking for bargains.”
At the close the Dow, was up 125 points to 10,193, the S&P 500 (SPX) gained 16 points to 1,088, and the Nasdaq (NASD) was up 25 points to close at 2,229.
The NYSE traded 2.3 billion shares with advancers over decliners by 3-to-1. The Nasdaq crossed 1.1 billion shares with advancers ahead by just under 2-to-1.
Despite strong equity markets and a rise in the euro, crude oil fell again with the July delivery off 76 cents to $70.04 a barrel. The Energy Select Sector SPDR (NYSE: XLE) gained 91 cents, closing at $53.07.
June gold fell $12.50, closing at $1,176.10 an ounce, and the PHLX Gold/Silver Sector Index (NASDAQ: XAU) gained 1.29 points to 166.11.
What the Markets Are Saying
Our readers will remember on May 10, just two days after the “flash crash” day or “glitch day,” which drove stocks to just above the February lows, I said, “With two extremely volatile sell-off days behind us, it appears more than likely that there are still some institutional buy orders between the S&P 500’s February closing low of 1,063 and the 200-day moving average at 1,097. And unless the market closes under the February low, the overall bull market is intact but shaky.”
At that time, it was as clear as if the institutional ledgers of buy programs had been opened to us that there were buying programs in force that could be triggered again.
And, on Friday morning, just minutes after the opening, when stocks fell sharply lower and into those zones, blocks of buy orders suddenly appeared and reversed the sell-off. Interesting that the low on Friday was made in the first five minutes of trading, and that low was at 1,055.9, a number that was almost exactly identified by the trading of May 6.
Coincidence? As the Goldman Sachs executive said recently before the Senate Finance Committee, “There are no coincidences on Wall Street.”
Friday’s impressive reversal at just above the closing low of February’s correction provides five very strong numbers that could turn out to be genuine bottoms to the current correction. So this gives us clearly defined support and resistance areas in which the stock market could trade for the remainder of the summer.
A new support line may now be drawn from the S&P 500’s Oct. 2 low of 1,020 to the Nov. 2 low of 1,029, to the Feb. 5 low of 1,045, to the two recent lows of 1,066 and 1,056 (reversal days).
The key support has held. The worst is over — for now. But the longer-term outlook is still cloudy.
Tomorrow we’ll consider the resistance zones, but for now, the immediate trend is up with the first resistance at the 200-day moving average at S&P 1,104, and Dow 10,263. A violation of the last week’s lows, which are major support lines, would almost certainly result in a run of new selling.
Today’s Trading Landscape
Earnings to be reported before the opening include: Campbell Soup, Flotek Industries, Longtop Financial and Yingli Green Energy.
Earnings to be reported after the close include: ChinaEdu, Donaldson and Phillips-Van Heusen.
Economic reports due: existing home sales (the consensus expects 5.6 million).
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