The bulls are in overdrive now as the rebound out of last week’s lows pushed the major average back up and over important technical resistance levels.
Either this is a powerful dead-cat bounce, or the start of another long run to the upside.
The Nasdaq Composite posted its best one-day gain of the year, rising 2.4% thanks to solid results from Apple (AAPL) Monday night that has capped the best three-day run since December 2011. The Dow Jones Industrial Average was limited to a 1.3% gain as disappointing earnings pulled down components like McDonald’s (MCD), IBM (IBM) and Coca-Cola (KO).
But that was enough to push the Dow back up and over its 200-day moving average, making it the last major index to cross back over this level and make a “V-shaped” recovery from the worst of last week’s decline.
It was all risk-on with commodities moving higher, pushing the SPDR Gold Shares (GLD) to its 50-day moving average for the first time since August while crude oil inched higher, as the yen carry trade moved higher, Treasury bonds moved lower and high-yield corporate bonds moved higher.
Check, check, check, and check.
The rebound in high-yield bonds, as represented by the iShares High Yield Corporate Bond Fund (HYG), has been a real driver of the rebound after Federal Reserve officials played up the idea that the central bank might have to dole out more stimulus should market volatility and weakness overseas drag down the U.S. economy.
The volatility in the HYG, revealing the stomach-churning action in the junk bond market, shows just how high strung the situation is to any change in Fed policy. In fact, analysts at Citigroup estimate that the market needs an inflow of around $200 billion per month to prevent a market crash.
Chatter that the European Central Bank, faced with a marked slowdown in European growth (especially in Germany), could start aggressive buying of corporate bonds has also played a role in reversing investor sentiment over the past week. You can see this in the way European bank stocks like National Bank of Greece (NBG) have stepped back from the abyss and moved higher.
Breadth was strong, with more than 2,000 net advancing issues on the New York Stock Exchange — the best showing since March. And the strength of the rebound was strong enough to trigger a buy signal in an indicator I follow closely as the PowerShares Nasdaq QQQ Trust (QQQ) flipped its parabolic stop-and-reverse.
Sectors showing strength include energy, retailers and regional banks.
Where stocks go from here depends on the flow of economic data and the Fed’s policy decision next Wednesday. Markets, especially Treasury bonds, have been discounting a significant pullback in U.S. economic performance. If it fails to materialize, or the Fed front-runs it by postponing the planned end of its QE3 bond purchase program, then stocks and bonds will continue to push higher.
Tomorrow, we have an update on consumer price inflation. If it’s soft, it will bolster expectations that QE3 will be extended. I’m looking for the rebound to continue, at least in the short term, and have recommended positions such as near-term calls in Caterpillar (CAT) to profit from the move.
I like precious metals as a medium-term play on concerns that central banks are not going to be satisfied until inflation becomes an acute problem. The VelocityShares 3x Long Gold ETN (UGLD) that I recommended to Edge subscribers in late September is up more than 10% this month.
But moving into November, I am looking for market weakness to rematerialize for a number of reasons covered in a recent post here.
More From InvestorPlace
- 6 Reasons the Selloff Isn’t Over
- 3 Cheap Stocks Sitting at 3-Year Lows
- The Best ETF for Large-Cap Growth