Market Vulnerable to a Sharp Reversal

by Sam Collins | October 2, 2013 2:20 am

The U.S. government may have been closed Tuesday, but Wall Street was open for business and stocks surged. It was also the first day of Q4, and the S&P 500 kicked it off with a 0.8% gain.

Cash deposits, which are typical on the first days of a quarter, flowed into stocks. A good portion of the funds headed into health care and technology stocks, but all 10 of the S&P 500’s sectors registered gains. Small-cap stocks benefitted the most with the Russell 2000 index gaining 1.3%, setting a new all-time high. The Nasdaq, with its emphasis on technology and biotechnology stocks, rose 1.2%. Gold, crude oil and other hard commodities registered losses.

At Tuesday’s close, the Dow Jones Industrial Average was up 62 points at 15,192, the S&P 500 gained 13 points at 1,695, and the Nasdaq added 47 points at 3,818. The NYSE traded 717 million shares and the Nasdaq crossed 442 million. Advancers outnumbered decliners on both major exchanges by about 2.5-to-1.

RUT Chart
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 Chart Key[1]

The Russell 2000 broke to a new high Tuesday as technology and high-P/E, speculative stocks got most of the attention. MACD is positive but declining.

Nasdaq Chart
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The Nasdaq Composite also broke from its bull channel to a new 13-year high. But MACD is neutral and close to issuing a sell signal. Volume, at 442 million shares, was relatively light for a big breakout day.

Conclusion: The new highs made by the Nasdaq and Russell 2000 and other high-P/E and more speculative indices brightened the day of many bullish day traders. But big days up are not unusual for the first day of a new quarter since capital is bound to flow into the system from IRAs, 401(k)s and other retirement plans.

History indicates that rallies like this are vulnerable to immediate reversals, especially when the gains are focused on the most speculative stocks. Even though the rally was led by institutional buying, volume was too light to overcome the uncertainties from the overhanging congressional deadlock and impending debt ceiling. The U.S. dollar’s plunge to an eight-month low should communicate the seriousness of the deadlock and its impact on the creditworthiness of the country.

Those who sell profitable positions now may miss another new high, but they may also miss a sharp reversal. It is time to book profits and exercise patience until Washington wakes up and reaches an agreement on behalf of the people.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[2].

For a list of this week’s economic reports due out, click here[3].

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