Following a modest opening, stocks moved higher on expectations of better Q3 earnings. By noon, the Dow Industrials had gained about 120 points, but volume lagged until early afternoon, when it picked up and drove prices another 150 points to over 10,000 for the best day in weeks for U.S. stocks.
Yesterday also marked the second advance in as many days. But with a lack of news and stocks having been down for eight consecutive days, many technicians concluded that the rally was no more than a technical bounce from the lowest levels of the year.
The financial group turned in the best performance, up 4.4%. State Street Corporation (NYSE: STT) projected a Q2 profit well above analysts’ estimates and was credited as the catalyst for the group’s gains. Both American Express Company (NYSE: AXP) and JPMorgan Chase & Co. (NYSE: JPM) rose 5%, and Bank of America Corporation (NYSE: BAC) gained 4.6% — all Dow components.
Technology stocks were strong with Cisco Systems, Inc. (NASDAQ: CSCO) up 5.3% and Hewlett-Packard Company (NYSE: HPQ) gaining 4.2%. The technology-heavy Nasdaq rose 4.2%.
The U.S. dollar fell versus the euro, and was off 0.2% against a basket of currencies. And Treasurys fell as investors moved to more aggressive assets.
At the close, the Dow Jones Industrial Average rose 275 points to 10,018, the S&P 500 gained 32 points to 1,060, and the Nasdaq was up 66 points to 2,159.
The NYSE traded 1.3 billion shares with advancers ahead of decliners by over 5-to-1. The Nasdaq crossed 652 million shares with advancers ahead by 3.5-to-1.
Crude oil for August delivery rose for the first time in seven sessions, gaining $2.09 at $74.07 a barrel. The Energy Select Sector SPDR (NYSE: XLE) gained $1.79, closing at $51.65.
August gold rose $3.80 to settle at $1,198.90 an ounce. The PHLX Gold/Silver Sector Index (NASDAQ: XAU) closed at 173.09, up 4.72 points.
What the Markets Are Saying
Yesterday’s rebound was violent, sudden, and resulted in a big loss for anyone who was short the market. As a result, I received a score of e-mails asking how the market could jump 275 Dow points in just a day if we are in a bear market.
While bull markets are known for a plodding action that takes weeks to form support zones and are coupled with relatively mild corrections, bear markets behave the opposite. Sell-offs in bear markets usually plough through days or even weeks of support, knifing through the bull’s zones in just days. And then, just when the average investor decides to plunge into the short side of the market, a violent rally smashes the shorts forcing them to run and cover.
The last point, the forced short cover, is the reason why corrections (up) in downtrends are usually violent, low-volume reactions. Those who are short are usually speculators who panic and cover their short, buying in at “the market” as soon as their position is threatened. This volatility is characteristic of a true bear market.
Yesterday’s Trade of the Day was the ProShares UltraShort Russell 2000 Value ETF (NYSE: SJH), and the write-up noted that, “the market is currently oversold and due for a bounce.”
When our indicators show that the market is oversold, traders should wait for stocks to rally and then short into the rally. Stop-loss orders (buy orders above the market) should be entered to protect against one of the violent short-covering episodes.
The key to making money trading the short side is no different than on the long side: You must protect against losses and take solid profits when they are offered.
Yesterday’s bounce pushed above the first barrier (resistance), which is the breakdown point at the neckline of the potential head-and-shoulders top at 1,040 to 1,045. The next barrier is the June 28 low of 1,071, followed by the 20-day moving average at 1,074, and then the 50-day moving average at 1,101.
Trading in a bear market will test your skills as a trader and put your emotions to the test. It is not suited to everyone, so as President Harry Truman said, “If you can’t stand the heat, get out of the kitchen.” But for those who can stand the heat, there could be a great feast ahead.
Today’s Trading Landscape
Earnings to be reported before the opening include: Greenbrier Companies, Helen of Troy and International Speedway.
Earnings to be reported after the close include: Lawson Software and Nu Horizons Electronic.
Economic reports due: chain store sales, jobless claims (the consensus expects 465,000), EIA natural gas report, EIA petroleum status report, consumer credit (the consensus expects -$2 billion), Fed balance sheet and money supply.
If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.
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