Group Rotation Continues as We Await a Breakout

Buying in small and mid caps is offsetting selling in the larger indices

Stocks closed flat Wednesday after the Federal Reserve left short-term interest rates unchanged, but said “near-term risks to the economic outlook have diminished.” Some analysts interpreted this to mean we could see a rate hike in September despite the tradition of doing nothing prior to a presidential election.

While the Dow Jones Industrial Average and S&P 500 fell slightly, the tech-heavy Nasdaq rose 0.6%, boosted by a 6.5% jump in Apple Inc. (NASDAQ:AAPL) on better-than-expected earnings.

Other notable gainers included Garmin Ltd. (NASDAQ:GRMN) and State Street Corp (NYSE:STT), which added 11.6% and 9.3%, respectively, on earnings beats. Boeing Co (NYSE:BA) advanced 0.8% on a smaller-than-anticipated quarterly loss.

Health care stocks continued to march higher with a gain of 0.5%, offsetting declines in energy stocks and weakness in the U.S. dollar. The iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) gained 2.4%.

Crude oil fell 2.3% to $41.92 a barrel following a reported increase in crude and gasoline stockpiles. Gold for December delivery was up 0.5% at $1,334.50 an ounce.

At Wednesday’s close, the Dow Jones Industrial Average fell 2 points to 18,472, the S&P 500 was off 3 points at 2,167, the Nasdaq gained 30 points at 5,140, and the Russell 2000 was up 2 points at 1,219.

The NYSE Composite’s primary exchange traded 834 million shares with total volume of 3.4 billion. The Nasdaq crossed 2 billion shares. On both major exchanges, advancers outpaced decliners by 1.6-to-1. And on the NYSE, block trades increased to 5,012 from 4,356 on Tuesday.

MDY Chart
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On Tuesday, SPDR S&P MidCap 400 ETF (NYSEARCA:MDY) appeared to be breaking out of the “high tight flag,” but on Wednesday, the pattern reversed with a sell signal from my proprietary internal indicator, the Collins-Bollinger Reversal (CBR). While volume that accompanied the signal was higher than it has been in the past two weeks, it was not higher than average.

Support rests at the bottom of the flag at $279 and extends to the June high at $278. MACD is declining but still positive by a fraction.


The small and mid caps are holding up better than the large caps of the Dow and S&P 500 as group rotation into technology and health care continues to absorb any selling. The S&P 500 remains extended, and that’s one reason for the swap to small and mid caps.

My personal inclination is to ignore the CBR sell signal, chalking it up to another miscue on the part of the Fed until proven otherwise.

The big driver of stocks continues to be earnings. As long as we get positive surprises like Apple’s gift to the market, the S&P 500’s high tight flag formation should eventually break to the upside.

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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