Both the Dow Jones Industrial Average and the S&P 500 set a new five-month high yesterday, as the U.S. dollar fell sharply on hopes of further quantitative easing. The optimism was encouraged by the Japanese central bank’s cut of its key interest rate to zero and its plans to purchase bonds and other asset-backed securities in order to further stimulate its economy.

All 10 S&P sectors had gains yesterday, led by the materials, industrials and financial sectors. And the technology-laden Nasdaq rose 2.4% to its highest level since May 12.

The trigger for yesterday’s run-up was a positive September ISM number. The index came in at 53.2 versus an expected 51.8. The report is comprised of service-sector companies, but it also includes construction and public administration, so it is considered representative of a broad base of the economy. 

The other major push for stocks was Australia’s decision to leave interest rates at current levels rather than raising them as most economists had expected.

Several favorable corporate reports, led by Walgreen Company (NYSE: WAG), may have also contributed to buyers’ optimism. The big retail chain said that sales in September were up 0.4% versus an expected decline, and the shares gained 2.6%.

Treasurys remained in demand with the 10-year note’s yield falling to 2.48%. The dollar fell against the euro, which closed at $1.383, up from $1.3689.

At the close, the Dow Jones Industrial Average rose 193 points to 10,945, the S&P 500 gained 24 points at 1,161, and the Nasdaq gained 55 points to 2,400. 

The NYSE traded 1.2 billion shares, and the Nasdaq traded 624 million shares, both with advancers over decliners by 4.35-to-1.

November delivery crude oil rose $1.56 to $84.84 a barrel, which is the highest level for crude oil since May 3, and was spurred on by weakness in the U.S. dollar. The Energy Select Sector SPDR (NYSE: XLE) rose $1.32 to close at $57.42. 

October gold rose $12.50 to $1,338.90 for the eighth gain in 10 sessions. The PHLX Gold/Silver Sector Index (NASDAQ: XAU) rose 6.1 points to close at 202.88.

What the Markets Are Saying

The bull has spoken. Yesterday, the major indices settled the issue of the near and intermediate direction with a resounding break over resistance that has held back buyers for more than five months. And even though volume, at 1.2 billion shares on the NYSE, is not yet at classically high levels, it is good enough to confirm the breakout since breadth came in at over 4-to-1.

This puts the market back on the offensive with the next resistance coming at the post-flash-crash rebound of May 13. For the S&P that number is 1,174, for the Dow it is 10,953, and for the Nasdaq the number is 2,434. 

The break yesterday also confirms that the S&P 500’s inverse head-and-shoulders formation, last discussed here on Sept. 27, has met the criteria needed to confirm a genuine break. The neckline of the formation at 1,129 was penetrated on Sept. 20, but required a 3% break to confirm it. That number, 1,163, was met yesterday, and gives a target of around 1,230. This, of course, would be a new high and, if it makes it, would confirm that the bull market has resumed. The number 1,230 is curiously coincidental in that the Fibonacci number of 61.8% retracement of the bear market is also at 1,230, according to S&P’s Mark Arbeter.

Finally, the stochastic and momentum indicators also flashed a buy signal yesterday. And the 50-day moving average of the Dow Industrials crossed up and through its 200-day for a gold cross buy.

Now, before our young traders jump into this market with both feet, I must caution that all internal indicators are still overbought, so it would not be unusual for stocks to surge for a day or so and then have a sharp round of profit-taking. If you trade, use common sense and stop-loss orders. And don’t overextend yourself. Buy only on support levels and take profits on resistance zones.

If the bull market has resumed, then there will be plenty of time to make money — just don’t lose it now in a rush of bullish over-enthusiasm.

For one sound way to make money, see the Trade of the Day.

Today’s Trading Landscape

Earnings to be reported before the opening include: Acuity Brands, Constellation Brands, Costco, Helen of Troy, Monsanto, Robbins & Myers and RPM.

Earnings to be reported after the close include: Immucor, Marriott and Ruby Tuesday.

Economic reports due: Bank Reserve Settlement, MBA purchase applications, Challenger Job-Cut Report, ADP National Employment Report, EIA petroleum status report and Treasury STRIPS.

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

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