It’s finally happened: After months of harrowing market volatility, things are perking up again thanks to some upward momentum in energy prices. West Texas Intermediate gained an impressive 12.4% on Monday to close above its 50-day moving average for the first time since early November.
The catalyst for the move was Russia’s oil minister’s comments that there is enough support to push through a production freeze deal with OPEC by March 1. Nigeria also came out in support of a deal. This was enough to overcome bearish chatter from the U.S. State Department on the odds of a deal.
As a result, the Dow Jones Industrial Average gained 1.4%, the S&P 500 gained 1.5%, the Nasdaq Composite gained 1.5% and the Russell 2000 gained 1.2%. Treasury bonds were weaker, the dollar was stronger and gold lost 1.7%. U.S. markets followed overnight strength on Asian and European bourses.
The Dow leaped over two-month resistance near 16,500 to challenge its 50-day moving average in a pattern that looks remarkably similar to the breakout move from back in October. Investors are responding with enthusiasm to recent commodity price gains, with lots of focus on industrial metals and related mining stocks. And of course, energy stocks.
Edge subscribers enjoyed a 4.3% gain in their new Metals & Mining SPDR (NYSEARCA:XME) position. Edge Pro subscribers, for their part, are carrying a near 40% gain in their March $5 calls on Mexican cement maker Cemex SAB de CV (ADR) (NYSE:CX).
Oil and gas names led the way today with a 2.2% gain while defensive consumer staples and telecom stocks lagged. Breadth was positive, with advancers outpacing decliners 3.6 to 1 on the NYSE. United Technologies Corporation (NYSE:UTX) gained 4.7% on a report by CNBC that Honeywell International Inc. (NYSE:HON) was interested in a merger deal. Lumber Liquidators Holdings Inc (NYSE:LL) lost 19.8% after the CDC said the risk of cancer from formaldehyde in the company’s engineered flooring products had increased.
Another tailwind was provided by weak February flash manufacturing activity reports worldwide — increasing the pressure on policymakers to continue to push accommodative monetary policy. Japan suffered its largest decline since April 2014 as activity fell to its lowest level since June. The Eurozone also suffered a contraction in activity. The United States remained in positive territory — indicating month-over-month growth in activity — but the pace of growth was lower than expected.
The evidence suggests the uptrend should continue based on the intense quality of the three-day surge off of the Feb. 11 low. Since last Friday, Jason Goepfert at SentimenTrader notes that S&P 500 put in three days where it did not trade within 0.5% of the prior day’s close, buying pressure not seen throughout the history of the market.
There have been 12 times when the S&P 500 futures did this for two days in a row. And these occurrences revealed a pattern: Either stocks immediately backfilled the gap or the gap wasn’t filled for a very long time if at all. Of the 12 gaps, four were filled within five days. If the gap wasn’t filled within a week, seven of the eight instances either didn’t close the gap or took at least 20 days to do so.
Bottom line: If the bulls can pile on here and push the S&P 500 up and over resistance from the late January high and the 50-day moving average — near 1,950 — we should see a nice upside extension that reverses most if not all of the January unpleasantness.
Of course, this depends on the odds of a OPEC-Russia production deal, a continuation of the upward trend in oil, the Fed, Chinese policymakers, and more. But we cannot deny the stage is set for the first medium-term uptrend since October.
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