Wednesday’s markets started off well enough, with the Dow industrials again leading the other indices. But by noon, the buying dried up and the remainder of the day was spent trying to regain the opening levels. (See more of yesterday’s stock market news.)
Nevertheless, the Dow hit a new intraday and closing high. And, of more significance, the small- and mid-cap indices, and the broad-based indices like the Russell 3000 finally made the break, as well.
But calling what happened yesterday a massive breakout is like saying that your 14-year-old hound achieved a new record high jump by clearing the edge of the sofa to get a doggy biscuit. In other words, yesterday was encouraging but with little long-term significance — a real yawner with low volume and sagging energy.
Here are a few charts that illustrate my lack of enthusiasm for the “big breakout”:
When stocks or indices break to new highs that result in a strong follow-through, the break is usually accompanied by an increase in volume, breadth and momentum.
Currently, both volume and breadth are obviously lacking, but so is momentum. The momentum indicator is an overbought/oversold oscillator that measures the market’s internal strength.
An early indication of a rally following an oversold condition is usually evidenced by an upturn in momentum. But when a downturn from an overbought level of momentum occurs after a rally, it usually means that a downturn is about to occur.
Conclusion: The new highs in the indices are not being accompanied by high volume or strong breadth. And our momentum indicator is sagging — a signal that a minor retracement could occur. The bull is still in the meadow, but he appears to be dozing, and until he really awakes, we remain cautiously positive.
For a stock with increasing volume and momentum, see the Trade of the Day.
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.
If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.
