Will History Repeat With a Bearish Reversal?

The market's recent breakout looks similar to one that preceded a major downside reversal

June opened lower with the Dow Jones Industrial Average falling 122 points on Wednesday before reversing course. By the closing bell, each of the major indices had made fractional gains, but it was a wild ride.

Anticipation of today’s OPEC meeting and Friday’s U.S. labor market report resulted in low volume and high volatility. The referendum on the U.K.’s membership in the EU, coming later this month, also added uncertainty.

Defensive groups like consumer staples (+1%) and health care (+0.4%) led. The worst-performing sectors were technology (-0.3%) and consumer discretionary (-0.1%).

Last week, Federal Reserve Chair Janet Yellen told the market to expect the central bank to raise interest rates “within months” if the economy continues to improve.

The news was not so supportive Wednesday, with U.S. auto sales for May falling 6% from a year ago. General Motors Company (GM) reported an 18% drop and Ford Motor Company (F) saw a 6% decline.

And abroad, Chinese manufacturing data showed no improvement over the last disappointing report.

Crude oil lost 0.2% at $49.01 a barrel, and gold declined 0.2% to $1,211.90 an ounce.

At Wednesday’s close, the Dow Jones Industrial Average rose 2 points to 17,790, the S&P 500 also gained 2 points at 2,099, the Nasdaq added 4 points at 4,952, and the Russell 2000 was up 8 points at 1,163.

The NYSE Composite’s primary exchange traded 907 million shares with total volume of 3.5 billion. The Nasdaq crossed 1.8 billion shares. On the Big Board, advancers led decliners by 2-to-1, and on the Nasdaq, advancers led by 1.7-to-1. Block trades on the NYSE fell to 5,082 from 6,239 on Tuesday.

Russell 2000 Chart
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Chart Key

The small-cap Russell 2000 broke above the April high at 1,156, closing at 1,163 on Wednesday. A golden cross (a long-term buy signal) accompanied the break, and MACD issued a buy signal as well.

Conclusion

In Tuesday’s Daily Market Outlook, I noted the similarity of the S&P 500’s recent breakout to the one in December when a major downside reversal occurred immediately following a monthly high.

On Wednesday, the S&P 500 exceeded the recent closing high by a mere 0.27 points and failed to exceed the intraday high at 2,103.48. Beyond that, the April high at 2,111.05 will take another push from the bulls.

Today, we can note the similarity between the Russell 2000 and the more stable S&P 500. On Wednesday, the Russell 2000 exceeded its April high at 1,156, closing at 1,163, buoyed by a golden cross and a MACD buy signal.

The small caps are leading. But with a forward P/E of 17.7 and a trailing P/E of 20.8, stocks are not cheap. The bulls may follow the momentum for a short time. But this week, with its input from the Fed and OPEC, could spell the end of a powerful thrust, just as in December.

I remain neutral as before, but closely watching for a high-volume break in either direction.

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/2016/06/daily-market-outlook-will-history-repeat-bearish-reversal/.

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