The summer may be ending, but the volatility continued yesterday, as stocks extended the big gains made on Wednesday. And a late afternoon rally took prices to the high of the day almost at the final bell.

Economic reports seemed to be the reason for the rally. Initial jobless claims for the week ended Aug. 28 came in at 472,000 versus an expected 475,000, and continuing claims fell to 4.46 million from 4.48 million. Productivity in Q2 fell 1.8%, which is close to the prediction of 1.7%, and unit labor costs increased 1.1% as expected. But pending home sales resulted in a surprise — up 5.2% for the month where analysts had expected no change. Factory orders for July increased 0.1% versus an expected 0.3%.

Retail stocks enjoyed a strong session, climbing 2.2% following a report of strong back-to-school sales for August. Consumer discretionary stocks gained 1.8%, and industrials were up 1.2%.

Alcoa Inc. (NYSE: AA) led the 30 Dow stocks, up 2.85%, followed by The Home Depot, Inc. (NYSE: HD), up 2.58%, and The Boeing Company (NYSE: BA), up 2.1%.

The euro rose slightly versus the dollar, and Treasuries fell again, bringing the 10-year note to a yield of 2.627%.

The Dow Jones Industrial Average rose 51 points, closing at 10,320, the S&P 500 rose 10 points, closing at 1,090, and the Nasdaq gained 23 points at 2,200. 

The NYSE traded 960 million shares with advancers ahead of decliners by 2.5-to-1. On the Nasdaq, advancers were ahead by 1.7-to-1 on volume of 463 million shares.

Crude oil for October delivery rose $1.11 to $75.02 a barrel, and the Energy Select Sector SPDR (NYSE: XLE) closed at $53.55, up 44 cents. 

September gold gained $5.20, closing at $1,251.50 an ounce, and the PHLX Gold/Silver Sector Index (NASDAQ: XAU) gained 2.15 points, closing at 186.41.

What the Markets Are Saying

In just two days stocks have miraculously revived and vaulted to regain almost half of the losses of the entire month of August. And the S&P 500 sprang from the support zone at 1,040 to 1,055 following daily reversals and buy signals from our in-house indicator, the Collins-Bollinger Reversal (CBR).

Thursday’s Daily Market Outlook gave several levels of the S&P as targets for the reversal: Fibonacci numbers: 50% = 1,084, 61.8%=1,095, and then the 200-day moving average at 1,115. 

And, of course, there is the psychological resistance line at 1,100, which may turn out to be the first stop for this rally. Not only is 1,100 touted by the press as a barrier, but on eight days this year it has halted short-term rallies, and in every case the failure to penetrate 1,100 led to a reversal and a test of support back to the 1,040 – 1,055 support zone. This is not solid enough evidence to “bet the farm” on a reversal down from 1,100, but we should closely observe the tape action of the S&P 500 and be alert to the possibility of a reversal if it nears that mark.

Today is Friday, and that means a review of the sentiment indicators. Last week, the AAII bulls were at the lowest percent (20.74%) since July 7 at S&P 1,028. And July 7 marked the beginning of a five-week rally that took the S&P 500 to the top at 1,129 on Aug. 9.

This week another of the important sentiment indicators, the Investors Intelligence Advisors Sentiment, showed a drop of bulls for the third consecutive week. They were 29.4% versus 33.3% a week ago, and 41.7% at the start of August. Both the AAII and the Investors Intelligence reports are reverse indicators — a drop in sentiment for both is bullish for the markets. And the markets appropriately responded.

A very fine technician, Sam Turner, of RiverFront Investment Group, produced a study that appears to indicate that if the current rally follows the course of the two major reversals this year, the slope of the resulting uptrends is important. He concludes that we should see a multi-week rally and the now familiar resistance at 1,130 should again come into play by the end of September.

Well, it’s a long time between now and the end of September, but we should keep the target in mind. Between now and 1,130 there could be many opportunities to pick up long positions since the two prior bounces from 1,040 had many detours — one of which took us not to 1,040, but to the low of the year at 1,011.

We will not be publishing the Daily Market Outlook on Monday, but next week I will continue our discussion of forming a clearly defined trading plan. Have a happy and safe holiday.

Click here for today’s Trade of the Day.

Today’s Trading Landscape

Earnings to be reported before the opening: Campbell Soup.

Economic reports due: employment situation (the consensus expects -90,000 for non-farm payrolls, and 9.6% for the unemployment rate), and ISM non-manufacturing index (the consensus expects 53).

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.

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