Bulls’ Lack of Conviction is Troubling

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Last week’s advance carried over into Monday as commodity prices rallied. The Dow Jones Industrial Average logged a triple-digit gain with 29 of its 30 blue-chip stocks rising. However, volume was low, especially for such a big jump.

Crude oil rose following a report from the International Energy Agency that said it expects U.S. shale production to decline by 600,000 barrels per day in 2016 and another 200,000 per day in 2017. WTI April futures jumped 5.2% to $33.39 a barrel.

Energy stocks advanced 2.6% and materials were up 1.9%, the latter because of rising industrial metal prices.

Some of the day’s biggest gainers included the recently decimated Chesapeake Energy Corporation (CHK), up 19.5%, Freeport-McMoRan Inc (FCX), up 14.6%, and Alcoa Inc (AA), up 13.2%.

United Technologies Corporation (UTX) gained 4.7% after it was reported the company was shelving talks with Honeywell International Inc. (HON) about a potential merger due to antitrust worries. HON fell 2%.

Allergan plc (AGN) rallied 3.7% following better-than expected earnings on higher Botox sales.

Monday’s gains were not confined to U.S. stocks. The resignation of China’s top securities regulator contributed to a 2.3% gain in the Shanghai Composite and a 0.9% gain in Japan’s Nikkei.

The British pound fell against the U.S. dollar as London’s mayor said he would back the campaign for Britain’s exit from the European Union. The pound closed down 1.8% at $1.415.

At Monday’s close, the Dow Jones Industrial Average gained 229 points at 16,621, the S&P 500 rose 28 points to 1,946, the Nasdaq advanced 66 points to 4,571, and the Russell 2000 was up 12 points at 1,022.

The NYSE Composite’s primary exchange traded 1 billion shares with total volume of 4 billion. The Nasdaq crossed 1.8 billion shares. On the Big Board, advancers outpaced decliners by 3.4-to-1, and on the Nasdaq, advancers led by 3.3-to-1. Block trades on the NYSE declined to 5,527 from 6,198 on Friday.

Dow Jones Industrial Average Chart
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Chart Key

The triple-digit advance in the Dow Jones Industrial Average almost took the index above its 50-day moving average at 16,655. But despite an intraday high of 16,664.24, the Dow fell back on light volume and missed an opportunity to jump into and overcome the resistance, which is represented by its 200-day moving average at 17,247.

Dow Jones Transportation Average Chart
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Likewise, the Dow Jones Transportation Average backed off from piercing the inflection point at 7,455. A close above that number would have turned the trend in last year’s worst-performing index to sideways from down.

Unlike the industrials, volume was higher than normal, though, and that’s a favorable sign that the advance is probably not over.

Conclusion

When questioned whether the market’s “selling stampede” was over, Jeff Saut, chief investment strategist of Raymond James, said: “While markets can certainly do anything, I think the ‘selling stampede’ is over, even though it would have been better to see a fourth positive session.”

Saut was referring to Friday’s failure to produce a gain on the Dow Jones Industrial Average. But Monday’s 229-point jump proves that twin selling climaxes occurred with the double-bottom in August/September and January/February.

However, the lack of volume is disturbing enough to question the trend. In fact, I am more convinced than ever that the lack of conviction by the bulls has produced a sideways market but has yet to turn the trend to “up.”

Thus, we are likely being given an opportunity to sell into strength, which could last for several more days, to wait for a better buying opportunity.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2016/02/daily-market-outlook-bulls-lack-of-conviction-is-troubling/.

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