Don’t Follow the Herd Into the Market

Stocks began the month with a broad-based rally Tuesday, led by technology, up 3%, and financials, up 3.4%. New inflows of cash helped drive equities higher, as did dovish remarks from New York Federal Reserve President William C. Dudley.

U.S. auto sales hit a 16-year high for the month of February, which IHS Automotive attributed to low interest rates, employment gains and low prices at the pump. The report also said 2016 sales are expected to increase almost 2% to 17.8 million.

Safe-haven investments like gold and Treasury bonds fell while beaten-down sectors rose. The iShares NASDAQ Biotechnology Index (ETF) (IBB) soared 4.4%. And energy stocks jumped 2.6% as WTI oil rose 1.9% to $34.40 a barrel.

Russia’s energy minister said a number of oil-producing countries agreed to freeze oil output. Plus, some of the biggest U.S. shale producers said they plan to reduce oil and gas production by about 10% compared with last year. EOG Resources Inc (EOG), considered one of the most efficient shale producers, said it would only pump wells with a rate of return of at least 30% when oil is selling for $40 a barrel.

Honeywell International Inc. (HON) rose 4.5% after saying that a deal with United Technologies Corporation (UTX) was off. UTX fell 1.6%.

At Tuesday’s close, the Dow Jones Industrial Average jumped 349 points to 16,865, the S&P 500 rose 46 points to 1,978, the Nasdaq gained 132 points at 4,690 and the Russell 2000 advanced 21 points to 1,054.

The NYSE Composite’s primary exchange traded 1.1 billion shares with total volume of 4.8 billion. The Nasdaq crossed 2 billion shares. On the Big Board, advancers outpaced decliners by 4.6-to-1, and on the Nasdaq, advancers led by 3-to-1. Block trades on the NYSE increased to 7,202 from 6,320 on Monday.

IWM Chart
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Chart Key

The chart of the iShares Russell 2000 Index (ETF) (IWM) illustrates the difficulty facing small caps. Volume is declining and IWM is approaching a major band of resistance at $107 to $114. Plus, MACD is very overbought.

S&P 500 Chart
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The S&P 500 is also approaching resistance. Note the resemblance of the recent pattern with September’s “V” — and the continuation rally that followed it. Volume was average, just as it is now. And MACD was overbought at about the same level.


A herd mentality drove prices higher Tuesday, based on little more than an increase in oil prices and, as one of our readers pointed out, new money being put to work at the beginning of the month.

I believe the latter had an unusually positive impact since money managers jumped on oversold sectors. No sellers and all buyers equals high volatility.

Like the old ump, “I calls ’em like I sees ’em.” And I see stocks moving into major resistance zones with little to back the move other than fear that a move higher will be missed.

Herd mentality is no reason to invest in stocks — whether in the short or long term.

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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