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The Market Has a Message for the Bulls

It's telling us stocks are going to hold in the current range for the remainder of the summer or even break to new highs


Following Thursday’s sharp sell-off, the steepest decline in two months, Friday’s 1% rally in the S&P 500 marked the biggest gain in three months.

Despite conflict in the Middle East and the shooting down of an airliner over Ukraine, stocks ended the week on a positive note with all three major indices in the black.

The week’s recovery was led by an unlikely sector, the financials, as some heavy hitters posted better-than-expected earnings. Goldman Sachs (GS), BlackRock (BLK), Citigroup (C), JPMorgan (JPM) and Bank of America (BAC) all beat estimates, and the sector gained 1% for the week.

Technology stocks also rallied, up 1.4% for the week, with Intel (INTC), Google (GOOGL) and IBM (IBM) all registering gains. The tech-heavy Nasdaq jumped 1.6% on Friday, putting it ahead for the week.

FactSet said companies in the S&P 500 are on track for 5.5% growth in Q2. The Thomson Reuters/University of Michigan preliminary July sentiment index fell to 81.3 versus an expected rise to 83. And the Conference Board’s index of leading economic indicators rose 0.3% in June. Analysts were looking for a 0.5% increase.

At Friday’s close, the Dow Jones Industrial Average rose 123 points to 17,100, the S&P 500 gained 20 points to 1,978, the Nasdaq rose 69 points to 4,432, and the Russell 2000 gained 18 points at 1,152. The NYSE’s primary market traded 757 million shares with total volume of 3.1 billion shares. The Nasdaq crossed 1.8 billion shares.

For the week, the Dow rose 0.9%, the S&P 500 gained 0.5%, the Nasdaq was up 0.4%, and the Russell 2000 fell 0.7%.

Nasdaq Chart
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Chart Key

On Thursday, the Nasdaq successfully tested the support zone at 4,351 to 4,371, and even closed above its 20-day moving average at 4,410 on Friday. MACD, though in the bearish zone, is turning up. If the index can penetrate Friday’s high of 4,434, the overall formation will look like a bullish cup-and-handle.

RUT Chart
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Even though the Russell 2000 violated its 200-day moving average on Thursday, the dramatic jump on Friday and the attack on the 50-day moving average at 1,153 stopped the bears in their tracks. MACD is very oversold, telling us that the index is due for a continuation of Friday’s bounce.

VIX Chart
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Thursday’s 32% pop on the VIX could be telling us that near-term fear became so high that at the least a temporary bottom has been formed. Remember, the VIX is a contrary indicator, and very high daily readings like Thursday’s often have signaled important lows in the market.


In addition to the positive chart patterns of Friday, on Thursday, the AAII Sentiment Survey reported the lowest bullish readings in eight weeks at 32.36. This contrary indicator is often in the low 30s at bottoms.

Stocks were pummeled with bad news last week, starting with Federal Reserve Chair Janet Yellen’s view that “equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched.” And that was just the start of a horrible week of news.

Following Yellen’s testimony there was the continuing barrage of missiles from Hamas on Israel that led to an Israeli ground offensive, and finally, the shooting down of a civilian airliner, presumably by pro-Russian separatists, with the loss of 299 lives. And yet, with all of the negative developments, stocks staged a broad rally on Friday.

Barring something even worse, I believe the market is telling us that stocks are going to hold in the current range for the remainder of the summer or even break to new highs. There is no better indicator than the occurrence of a rally in the midst of bad news, supported by a VIX reaction on the same day as AAII readings indicating sentiment now favors the bulls.

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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