Don’t Buy the Market’s Bounce Yet

Following Wednesday’s jolting sell-off, stocks had a shaky start Thursday due to disappointing data from China, Japan and the euro zone. But when better economic numbers from the U.S. appeared, buyers turned the tide with a broad market advance.

The Markit flash purchasing managers index (PMI) increased to 56.7 in February from 53.7 in January. This was the strongest monthly improvement since May 2010, and it triggered a rally fueled by short-covering.

In other economic news, the Philadelphia Fed said manufacturing activity in the region contracted in February for the first time in nine months, but it attributed much of the decline to the foul winter weather.

Apple (AAPL) fell 1.2% following a downgrade by Barclays’ analysts. Tesla Motors (TSLA) jumped 8.4% after a Q4 earnings report that beat analysts’ estimates and contained an optimistic outlook for upcoming quarters. Wal-Mart (WMT) fell 1.8% on lower-than-expected earnings. Safeway (SWY) rose 2.1% after revealing that it was discussing a possible sale of the company.

At Thursday’s close, the Dow Jones Industrial Average rose 93 points to 16,133, the S&P 500 gained 11 points at 1,840, and the Nasdaq was up 30 points at 4,268. The NYSE traded total volume of 3.4 billion shares and the Nasdaq crossed 2 billion shares. Advancers outpaced decliners on the Big Board by 1.9-to-1, and on the Nasdaq, advancers led by 2.4-to-1.

SPX Chart
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Chart Key

The S&P 500 staged a quick recovery from Wednesday’s reversal. Even though it failed to make up for all of Wednesday’s losses, it is still in the game with its third test of resistance at the 1,850 area.

Markets usually break through on their third or fourth test of an all-time high. But had the market not rallied Thursday, the upward momentum would have sagged, and along with it, an opportunity to surge ahead.

RUT Chart
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The Russell 2000 small-cap index made a new closing high from the February low but failed to pop above Wednesday’s intraday high at 1,164. But MACD is bullish, and the small caps appear capable of leading the market.

Conclusion: Thursday’s recovery was enough to neutralize Wednesday’s reversal. Volume and breadth almost matched Wednesday’s numbers, but more importantly, the Russell 2000 marked a higher close at 1,162 than it did on Tuesday at 1,161. And even though it failed to jump above Wednesday’s intraday high, the price action and internal indicators appear strong enough to keep the rally going.

However, despite the strength of the market’s bounce, I’d hold off on making additional commitments until the major indices clear their immediate overhead. With Russia looking for an invitation to visit Kiev and Venezuela close to civil war, there is too much going on outside of the market to go long. Our real ally is patience.

Today’s Trading Landscape

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

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

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