Short-term Rally Could be in the Works

Stocks started with a gain of 65 Dow points yesterday in the first minutes of trading. But a midday sell-off took back the initial gains plus 70 more points in a rush for the exits. However, after three and a half hours of plodding, the deficit was finally overcome, leaving the Dow slightly in the black. So ended a volatile and sloppy day of trading in which stocks were again jerked around by news.

The news of the day was primarily economic. The May ADP Employment Change report showed that the private sector payrolls increased by 55,000, and that was 15,000 less than expected. Initial claims for the week ending May 29 totaled 453,000, slightly over expectations. Continuing jobless claims climbed to 4.67 million versus an expected 4.61 million. ISM Services Index for May was 55.4, which was in line with the 55.6 expected. Finally, factory orders for April increased by 1.2%, but 1.7% was expected.

In addition to the basic economic reports, those from retailers also reflected the economy’s uneven recovery. Costco Wholesale Corporation (NASDAQ: COST) fell after reporting that same-store sales rose 9% and net sales climbed 11%.  Target Corporation (NYSE: TGT) said that its same-store sales rose 1.3%, which was slightly higher than estimates.

Technology stocks led the Nasdaq (NASD) to a broad gain. Google Inc. (NASDAQ: GOOG) rose 2.48%, Microsoft Corporation (NASDAQ: MSFT) gained 1.51%, and Cisco Systems, Inc. (NASDAQ: CSCO) was up 1.58%.

The dollar gained versus the euro. The 10-year Treasury note fell to a yield of 3.381%.

At the close, the Dow Jones Industrial Average (DJI) gained 6 points to 10,225, the S&P 500 (SPX) rose 4 points to 1,103, and the Nasdaq rose 22 points to 2,303.

The NYSE traded 1.2 billion shares with advancers leading decliners by more than1.5-to-1. The Nasdaq crossed 620 million shares, and advancers there were ahead by almost 2-to-1.

July crude oil rose $1.75 to settle at $74.61 a barrel on rumors that the government was ready to ban all new offshore drilling, including shallow water exploration. But the rumor was later denied. The Energy Select Sector SPDR (NYSE: XLE) rose 71 cents to $53.43.

Gold for August delivery fell $12.60 to $1,210 an ounce, and the PHLX Gold/Silver Sector Index (NASDAQ: XAU) closed at 173.41, down 3.82 points.

What the Markets Are Saying

Yesterday’s market action was a non-issue with regard to the technical condition of the market, except for the performance of Nasdaq. The index, which is heavily weighted with technology stocks, broke above its 200-day moving average early last week and, unlike its brethren, has moved ahead with gusto.

Yesterday, the Nasdaq rose again, this time penetrating its 20-day moving average and pushing toward its next objective, the top of the resistance zone at 2,270 to 2,320.   Perhaps the Nasdaq is telling us that the broad market will follow. But one index can’t drag everything higher, and upside volume in the big-cap stocks, other than tech, must make a showing if the 200-day moving averages for the Dow Industrials and the S&P 500 are to be crossed.

This is Friday, which is the day that we usually discuss the indicators.

The first of the sentiment indicators, the AAII Sentiment Survey, showed that AAII members were less bullish, falling from 41.3% on May 20 to 29.82% on May 27. But this week the bullish reading jumped to 37.09% while the bearish reading fell from 50.88% the week before to 40.85%. The numbers are not extreme, but the direction of the change is disturbing since the market usually moves in the opposite direction of the members’ sentiment.

Another sentiment indicator, the Advisors Sentiment from Investors Intelligence, shows a similar mild increase in bullish sentiment for the second consecutive week, and that is not good.

As for the CBOE Volatility Index (VIX), it fell to under 30 yesterday after a week of wild gyrations that hit a new high for the year at over 45. Only four days of trading this week may have had something to do with the fall in volatility, but the number is still too high, so it may at best be discounted as neutral.

Our internal indicators, Moving Average Convergence/Divergence (MACD), stochastic (slow and fast), and momentum are consistently oversold. And MACD issued a short-term buy signal on Thursday.

Conclusion: Upside volume continues to be abnormally low, the sentiment indicators are negative, but the internal indicators are turning bullish. The chances for a short-term rally are improving, and the big-cap indices may even close above the major resistance at their respective 200-day moving averages.

If they are successful, then the trading target for the Dow is 10,550, for the S&P 500 it is 1,150, and the Nasdaq’s target is 2,400. However, if the big caps falter and close below the February/May lows, then we will almost certainly ramp down rapidly with a initial target of S&P 1,000.

Today’s Trading Landscape

Earnings to be reported before the opening include: American Woodmark, Blyth Industries and Met-Pro Corp.

Economic reports due: Employment Situation (the consensus expects a 9.8% unemployment rate), and Treasury STRIPS.


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Article printed from InvestorPlace Media, https://investorplace.com/2010/06/market-analysis-short-term-ally-would-be-in-the-works/.

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