Something is Rotten in the State of the Market

by Sam Collins | July 12, 2013 2:25 am

Chairman Ben Bernanke said Thursday that the Federal Reserve will “keep its easy-money policies in place for the long haul,” according to The Wall Street Journal. Stocks rose sharply in response to the chairman’s message with both the S&P 500 and the Dow Jones Industrial Average closing at record highs.

Technology, industrials, staples, materials, gold and interest-sensitive securities led the rally. Bernanke’s comments caused investors to move back into riskier assets and away from the U.S. dollar: The dollar index fell almost 2%, the 10-year Treasury bond’s yield was down 11 basis points to 2.572%, the Market Vectors Gold Miners ETF (GDX[1]) rose 7.7%, and the Market Vectors Steel ETF (SLX[2]) popped 4%.

At Thursday’s close, the Dow was up 169 points to 15,461, the S&P 500 rose 22 points to 1,675, and the Nasdaq jumped 58 points to 3,578. The NYSE traded 741 million shares and the Nasdaq crossed 431 million. On the Big Board, advancers exceeded decliners by 5.9-to-1, and on the Nasdaq, advancers were ahead by 2.4-to-1.

SPX Chart
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Chart Key[3]

On Thursday, the S&P 500, along with the other major indices, achieved a new closing high following Bernanke’s dovish remarks. This was exactly the opposite of last month’s reaction to his more hawkish statement that required a week of interpretation by his key lieutenants before investors were persuaded to buy.

Technically it appears that the S&P 500 is breaking out, but it is still shy of May’s high at 1,687.

Nasdaq Chart
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A similar pattern exists on the Nasdaq’s chart; however, the more tech-oriented and more speculative indices have led a broad market rally. This is not the conventional pattern normally associated with a major market breakout.

Conclusion: Call me overly traditional, but as Shakespeare’s Hamlet said, “Something is rotten in the state of Denmark.”

When new highs are made on low volume led by lagging sectors and speculative stocks, my instinct is to wait and watch before committing new money to the market.

As a reinforcement of my skepticism, one of the key indicators of public optimism/pessimism, the AAII Sentiment Survey, this week indicates that pessimism among individual investors fell for the second week in a row to its lowest level since January 2012. Bullish sentiment rose 6.9 percentage points to 48.9%. This is the highest level of optimism registered by the AAII survey since May 23, 2013 — one day after the May market top at 1,687.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[4].

For a list of this week’s economic reports due out, click here[5].

  1. GDX:
  2. SLX:
  3. [Image]:
  4. click here:
  5. click here:

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