Headline Chasers Likely to Suffer Losses

by Sam Collins | October 11, 2013 2:05 am

Stocks leapt Thursday at the opening bell and continued to rise on a broad-based round of buying. By the close, the Dow industrials had registered their second best day of the year as hope increased for an end to the political stalemate in Washington.

The Dow jumped 2.2%, but the real action was in Nasdaq stocks. The index popped 2.3%, and some of its stocks made spectacular gains. Netflix (NFLX[1]) was up 5.4%, Facebook (FB[2]) gained 4.9%, and the iShares Nasdaq Biotechnology (IBB[3]) jumped 3.6%.

The gains were attributed to a Republican proposal that a six-week extension of the nation’s borrowing limit be accepted in exchange for some unspecified spending cuts. The proposal does not end the partial government shutdown.

Weekly initial jobless claims rose to 374,000 from 308,000. It was claimed that much of the increase had to do with a computer breakdown in California that resulted in low numbers the week before that were applied to the current report.

At Thursday’s close, the Dow Jones Industrial Average was up 323 points to 15,126, the S&P 500 rose 36 points to 1,693, and the Nasdaq jumped 83 points to 3,761. The NYSE traded 738 million shares and the Nasdaq crossed 458 million. Advancers beat out decliners on the Big Board by 5.9-to-1 and by 5.2-to-1 on the Nasdaq.

Nasdaq Chart
Click to Enlarge

Chart Key[4]

After Wednesday’s beating, when the Nasdaq sliced through its 50-day moving average, it looked like it was headed for a test of its 200-day moving average (not shown) at around 3,400. But the cavalry came to the rescue Thursday in the form of headline news and saving the volatile index from destruction.

Reversal gaps like this come at a price, though, and that is that declines usually fill them within a few days. For now, however, the downward momentum has at least stalled, and so we may see another day or so of gains.

DJT Chart
Click to Enlarge

A reversal from our proprietary indicator, the Collins-Bollinger Reversal (CBR), for the Dow Jones Transportation Average is of greater longer-term significance than the trading reversal of the Nasdaq. This is because the transportation index is relied upon as a predictor of future growth. Buying there tells us that institutions are betting on continued economic growth.

CBR has successfully nailed the low of this index’s support line three out of four times, and it flashed a reversal on Wednesday.

Conclusion: Technically, the S&P 500’s close above 1,676 and its 50-day moving average at 1,678 (see Tuesday’s[5] and Wednesday’s charts[6]) should reverse the downside momentum of Tuesday.

However, the market is not operating in the sphere of economics, but of politics and headline risk. With much more negotiating before a final deal is struck, there could be many volatile sessions. Thus, it is prudent to stay the course that I outlined earlier this week: Buy stocks that you want to own at prices that you want to pay. Chasing the headlines could lead to losses.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[7].

For a list of this week’s economic reports due out, click here[8].

  1. NFLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=NFLX
  2. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  3. IBB: http://studio-5.financialcontent.com/investplace/quote?Symbol=IBB
  4. [Image]: https://investorplace.com/wp-content/uploads/2013/05/chart-key.gif
  5. Tuesday’s: https://investorplace.com/2013/10/daily-stock-market-news-unusual-market-conditions-present-a-buying-opportunity/
  6. Wednesday’s charts: https://investorplace.com/2013/10/daily-stock-market-news-sp-500s-dreaded-breakdown-finally-occurs/
  7. click here: http://www.bloomberg.com/apps/ecal?c=US
  8. click here: http://www.bloomberg.com/markets/economic-calendar/

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