Even though the Dow lost ground Tuesday by a slim margin, the S&P 500 rose 0.2% and the Nasdaq gained 0.3%. The Russell 2000, which has lagged all year, jumped 1.2%.
The resurgence in the small-cap index was attributed to bargain hunting in the chipmakers. Well-managed transports also attracted buyers, as the Dow Jones Transportation Average rose 2.6%.
Oil stocks fell again as U.S. crude futures posted new lows, falling 4.6% to $81.84 a barrel. It was the largest one-day percentage decline since late 2012. “Black gold” has tumbled more than 25% since mid-June. Slowing global demand and overproduction were blamed.
The sharp drop in stocks has made even low-yield bonds attractive this month. The yield on the 10-year Treasury note fell to 2.21% from 2.31% at the end of last week.
Chipmakers rose in anticipation of quarterly earnings from Intel (INTC). This pushed iShares PHLX SOX Semiconductor Sector ETF (SOXX) up 1.8%. After the closing bell, buyers of Intel were rewarded with a quarterly report that beat earnings and revenue expectations.
At Tuesday’s close, the Dow Jones Industrial Average fell 6 points to 16,315, the S&P 500 rose 3 points to 1,878, the Nasdaq added 14 points at 4,227, and the Russell 2000 jumped 12 points to 1,062.
The NYSE’s primary market traded 972 million shares with total volume of 4.8 billion. The Nasdaq crossed 2.5 billion shares. Advancers outpaced decliners on both exchanges by about 1.7-to-1.
The CBOE Volatility Index (VIX) is often used as a contrarian indicator, and as such, has finally reached an area of extreme pessimism that is usually reserved for market lows. Now, at the very least, it is signaling that Tuesday’s action should trigger a tradable rally.
The S&P 500 violated its support line (now resistance) at 1,910, as well as its 200-day moving average at 1,906. It had a good recovery going Tuesday until the afternoon when almost all of the early gains vanished.
In order to turn the index, it must close above both its 200-day moving average and the resistance line at 1,910. A failure to mount a strong recovery now could take it to its next meaningful support at 1,700.
With a key reversal day and twin buy signals from my proprietary indicator, the Collins-Bollinger Reversal (CBR), all violated, the Russell 2000 is very oversold and due for a bounce. Once it surmounts resistance at 1,082, the real test should come at the 1,120 breakdown area. All internal indicators are very oversold.
Conclusion
The stock market is due for a rally. Tuesday’s increase in volume and breadth was encouraging, but the quality of a rally has yet to be tested. Just as we had two 11-to-1 down days on the NYSE (i.e., down volume surpassing up volume), it would be encouraging to see the reverse occur.
This may happen since floor traders are saying hedge fund short covering has been heavy. Many hedge funds have huge losses this year, guessing wrong on the short side earlier and now going long to cover, and in some cases, holding long positions now that have been beaten up again.
A rally is due, so traders should go for the long side. But volatility is high, so use stop-loss orders or potentially face swift losses. Long-term investors could begin buying partial positions in oversold stocks (like my Trade of the Day) and add to them if the decline continues.
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.
