Industrial and energy stocks led the market yesterday to its biggest gain in over a month as investors focused on higher-risk stocks and ignored bonds. The gains were sudden and shocking to many speculators who had been shorting the market for over two weeks. And it was short covering that popped the Dow to a gain of 140 points in just the first five minutes.
Strong foreign markets also played a major part in yesterday’s powerful opening. And buying persisted despite an August ADP employment change report that showed payrolls falling by 10,000 last month. An increase of 13,000 was expected.
Some of the biggest gains were made in financial and industrial stocks, and 98% of the stocks on the S&P 500 registered gains. JPMorgan Chase & Co. (NYSE: JPM) gained 3.8%, and Citigroup, Inc. (NYSE: C) rose 3.7%.
The Dow Jones Transportation Average is generally considered to be a leading indicator, and it gained 3.6%. FedEx Corporation (NYSE: FDX) jumped 4.3%, United Parcel Service, Inc. (NYSE: UPS) was up 3.8%, Union Pacific Corporation (NYSE: UNP) rose 4.7%, and Norfolk Southern Corp. (NYSE: NSC) rose 4.36%.
With stocks strong, bonds weak, and commodities strong, the greenback fell 0.9% versus a basket of six currencies. The CRB Commodity index rallied to a 1.6% gain — its best performance in over a month.
At the close, the Dow Jones Industrial Average was up 255 points to 10,269, the S&P 500 rose to 1,080, up 31 points, and the Nasdaq jumped 63 points to 2,177.
The NYSE traded just under 1.2 billion shares with advancers over decliners by over 5-to-1. The Nasdaq crossed 606 million shares with advancers ahead by 4.6-to-1.
October crude oil rose $1.99 to $72.91, and the Energy Select Sector SPDR (NYSE: XLE) closed at $53.10, up $1.91.
Gold for December delivery added $11.10, closing at $1,250.30 per ounce. The PHLX Gold/Silver Sector Index (NASDAQ: XAU) fell 0.89 points and closed at 184.26.
What the Markets Are Saying
It should have been no surprise to our readers that the reversals — a key reversal and a Collins-Bollinger Reversal (CBR) — off of the 1,040 support line resulted in a breakout from the 1,040 to 1,055 zone. We covered it in detail for a week, and on Tuesday, I provided a copy of the S&P trading chart.
The buildup of pressure from the support zone blew prices through 1,055 and ran the S&P smack into the 50-day moving average at 1,080.
One reader asked the big question, “How far can this rally take the S&P 500?”
First I want to say that the work I do is not predictive, but responsive. What I mean by that is, if we are patient, the market will tell us what the next move will be. We then must respond to that signal if that is part of our “game plan.” CBR signals and key reversals are part of my game plan, so I responded by telling you how important they were in the context of the overall support zone at 1,040 to 1,055.
The first trading target for a breakout of this nature is the next resistance — yesterday it was the 50-day moving average at 1,080 — exactly where the S&P closed. Next are the retracement percentages from the last high at 1,130 to 1,040 provided by the Fibonacci numbers: 50% = 1,084, 61.8%=1,095, and then the 20-day moving average at 1,115.
This brings me to the next subject in this week’s mini-class on trading.
Yesterday, I defined the objectives of various classes of investors. One class was the daily to monthly traders: “Buyers and sellers (short) who are interested in capitalizing on short-term moves in the stock market. Their tool is primarily technical analysis and identifying trends is of paramount importance to their game plan. They are the gamers. They get a kick out of trading, want high returns, and will take higher risks to achieve their goal. But in order to be successful, they require a disciplined approach with a static set of rules that is devoid of emotion. Emotional traders lose; disciplined trades tend to be winners.”
And on Monday, I stressed the importance of three trading rules that are part of my game plan:
1. Determine the trading spread in a volatile market and only take long positions that are priced below the halfway point of the spread (shorts are the opposite).
2. Always use a “limit order. Never initiate a new position with a “market order.”
3. Always enter a fixed stop-loss order at a point below the daily spread or support line that, if violated, could mean that the near-term trend has changed.
Admittedly, these topics were out of order, but let’s talk about the game plan. A game plan is needed in order to totally eliminate the emotion that forces each of us to make impulsive decisions. For example, tops of markets are usually made as a result of “trading bubbles” created by the mass fear, not greed, of investors who cannot accept the idea of missing out on higher prices. So they buy “at the market” despite a clearly overbought market condition in the baseless hope that other investors will push prices higher. The result is that along with many others they buy at the top of the market, i.e., Greenspan’s “irrational exuberance.”
And, “selling climaxes,” like the bottom of March 2009, are made by the mass fear that all stocks can fall to zero despite evidence of years of prices/earnings relationships that prove otherwise. A client actually told me that his high-quality portfolio “could go to nothing” on March 6, 2009, so, in a moment of panic, he sold out his entire portfolio and lost years of gains on the day the market made its final bear market low. These are examples of irrational thinking and the results of a lack of discipline that is provided by a clearly defined trading (game) plan.
Tomorrow I’ll discuss the format of a proper trading plan.
Today’s Trading Landscape
Earnings to be reported before the opening include: Del Monte, Layne Christensen, Movado Group, Sycamore and UTi Worldwide.
Earnings to be reported after the close include: ArcSight, Cooper Companies, Esterline Technologies, Finisar, H&R Block, Mitel Networks, Quiksilver, SeaChange, Take-Two and Ulta Salon.
Economic reports due: chain store sales, Monster Employment Index, jobless claims (the consensus expects 470,000), productivity and costs (the consensus expects -0.9% for non-farm productivity and 1.2% for unit labor costs), factory orders (the consensus expects 0.3%), pending home sales index, EIA natural gas report, 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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