Rare Bullish Indicator Should Give Investors Confidence

by Sam Collins | October 15, 2013 2:55 am

Stocks opened lower on Monday, but reports that an agreement to end the partial government shutdown attracted buyers and the major indices closed modestly higher. At this time, it is rumored that Republicans will agree to a three-week cooling off period before tackling the touchy issue of the federal debt ceiling. And the Treasury Department indicated that it had $30 billion in cash that could last “for a week or two.”

While the focus has been on the budget and debt ceiling negotiations, FactSet estimates that year-over-year growth for the third quarter will be just 0.8% compared to the first quarter’s 3.4% growth and the second quarter’s 2.3%.

Technology stocks were the focus of buying with Apple (AAPL[1]) gaining 0.7%, Google (GOOG[2]) up 0.5%, and Netflix (NFLX[3]) jumping 7.8%.

At Monday’s close, the Dow Jones Industrial Average gained 64 points at 15,301, the S&P 500 added 7 points at 1,710, and the Nasdaq rose 23 points to 3,815. The NYSE traded 575 million shares and the Nasdaq crossed 379 million. On the Big Board, advancers led decliners by 1.4-to-1, and on the Nasdaq, advancers were ahead by 1.6-to-1.

VIX Chart
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After popping to over 20 last week, the CBOE Volatility Index (VIX) settled down, and that usually means that traders are taking long positions.

Dow Chart
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Chart Key[4]

The Dow industrials had an impressive reversal up from major support on Thursday. The index drove above both its 20-day and 50-day moving averages and triggered a MACD buy signal.

Conclusion: In the short run, markets are often jostled by so-called “headline events” that cause temporary fear and the subsequent placing of short-sale orders. Jeffrey Saut of Raymond James correctly pointed out that these events most often lead to dramatic reversals triggered by massive short covering. One such reversal, with a “90% upside day” (90% of volume was on the upside), occurred on Thursday. This is a powerful bullish indicator that has occurred for the first time this year. And this was followed on Monday by MACD buy signals on the Dow and S&P 500.

Does this mean that investors should now jump into the market and ignore the current crisis in Washington? Caution is still favored, since short-term blunders by the politicians might still lead to a quick sell-off that could provide an excellent opportunity to load up on stocks. This unusually bullish signal does, however, increase our confidence that the long-term trend is decidedly bullish and courageous investors will be richly rewarded.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[5].

For a list of this week’s economic reports due out, click here[6].

  1. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  2. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  3. NFLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=NFLX
  4. [Image]: https://investorplace.com/wp-content/uploads/2013/05/chart-key.gif
  5. click here: http://www.bloomberg.com/apps/ecal?c=US
  6. click here: http://www.bloomberg.com/markets/economic-calendar/

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