The Nasdaq Hits a New High as Small Caps Lead

Bad news for the economy was, strangely enough, good news for a lot of stocks

On Tuesday, stocks rallied, led by gains in crude oil stocks and a weaker-than-expected ISM Non-Manufacturing Index. The August index fell to 51.4% from 55.5% in July and was below the consensus of 54.7%.

The ISM report indicates that there is a slower recovery in both the manufacturing and non-manufacturing sectors. Thus, pressure is on the Federal Reserve to abandon its plan to raise rates sometime this year.

Financial stocks fell in reaction to the report, but gains in telecom and utilities offset losses in the financial sector. Utilities gained 1.1% and telecom shares gained 0.9%. Energy stocks rose 1.5% led by EOG Resources Inc (NYSE:EOG), up 6.7%, due to an announced merger with Yates Petroleum. WTI crude oil closed up 1% at $44.85 per barrel.

Healthcare stocks rebounded: Gilead Sciences, Inc. (NASDAQ:GILD) rose 1.3%, and the exchange-traded fund iShares Biotechnology ETF (NASDAQ:IBB) jumped 1.2%.

At the close the Dow Jones Industrial Average gained 46 points at 18,538; the S&P 500 closed at 2,186 up 6; the Nasdaq set a new closing high at 5,275.91, up 26 points; and the Russell 2000 gained 2 points at 1,253.

The NYSE’s primary exchange traded 857 million shares with total volume of 3.4 billion shares. Nasdaq crossed 1.8 billion shares. On the Big Board, advancers outpaced decliners by 1.4-to-1, and on Nasdaq advancers led by 1.2-to-1. Blocks on the NYSE increased to 5,075 from 4,803 on Friday.

Nasdaq good recovery
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After hitting the Brexit June low, the Nasdaq rallied for a gain of over 15%. And yesterday it set a new closing high at its high of the day — a powerful reminder that the small caps are still leading the bull market.

Volume was average, which in this low-volume market means “high,” and MACD is hooking up from an oversold condition. First support is at about the 5,190 line, or more precisely the top of the August gap at 5,186.

Conclusion: The stock market is always full of surprises, and today the ISM report was paradoxically a negative for the economy, but a positive for stocks. The Fed must now deal with a slowing economy that could slow even more if Ms. Yellen & Co. decide to push for a rate increase before next year.

As for the technical side of the market: The small- and mid-caps continue to lead. However even the big-caps of the S&P 500 continued upward momentum by regaining the ground above the inflection point noted in my DTA of Sept. 1 at 2,175.25.

It looks like the small- and mid-caps will again lead the more senior indices to higher ground. Thus my emphasis for the next several reports (See Trade Of The Day) will be stocks from that bullish corral.

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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