Although it was not a broad-based advance, stocks closed yesterday on the plus side for the sixth consecutive day. With little news, investors keyed off of the foreign markets, which had been firm before the U.S. market opening.
Retail stocks were strong throughout the session with Internet retailers doing well following reports from MasterCard Advisors’ SpendingPulse that U.S. retail sales increased by an estimated 3.6% year-over-year. Amazon.com (AMZN) was a prime beneficiary of the increase and the stock closed 0.6% higher.
But the financial sector came under pressure following a U.S. Treasury Department agreement to provide Fannie Mae and Freddie Mac with as much capital as needed over the next three years. The Wall Street Journal reported that other companies were worried over the impact of the plan on their operations.
At the close, the Dow Jones Industrial Average (DJI) rose 27 points to close at 10,547, the S&P 500 (SPX) gained a point to 1,128, and the Nasdaq (NASD) gained 5 points to 2,291.
The NYSE traded 705 million shares with advancers slightly ahead of decliners. The Nasdaq crossed 335 million shares with decliners ahead by 3-to-2.
February crude oil rose 72 cents to $78.77 a barrel, and the Energy Select Sector SPDR (XLE) gained 27 cents, closing at $57.81.
Trading in gold was very light yesterday, but the February contract gained $3.10 at $1,107.90, and the PHLX Gold/Silver Sector Index (XAU) fell 72 cents to $171.29.
What the Markets Are Saying
With all of the major indices now clearly above the recent tight trading patterns, I pointed out yesterday that, going into the new year, prices would likely continue to rally. Various targets were highlighted, but the most important one, 1,120 on the S&P 500, was significant because it represents the 50% retracement mark of the October 2007 to March 2009 bear market as applied to a broad-based index.
Today, let’s consider the internal strength of the indices from the sentiment and internal indicators.
First, the sentiment indicators: Last week’s American Association of Individual Investors (AAII) sentiment survey of shows 37.68% bullish and 37.68% bearish. The bullish number is the lowest since the Nov. 5 low of 22.22%, and even though there are just as many bears as bulls, the reading is bullish for the market since the AAII survey is a “contra-indicator.” In other words, low bullish readings are “good” and high bullish readings are “bad.”
The next sentiment number to consider is the CBOE Volatility Index (VIX), which when extremely high shows “fear,” and when extremely low indicates “complacency.” At yesterday’s close of 19.47, a low reading, complacency is telling us that the market could have a correction.
The last time that the VIX showed such a low number was August 2008, just before the big sell-off and confirmation of a bear market. But, at that point, the market had already topped in October 2007, and had given a score of bearish signals.
And if we go farther back to 2005-2007, the VIX had readings of 9.4 to 23.8. Most technicians believe that the 2005 to 2007 numbers represent “more normal” readings, so I would not put much emphasis on the current VIX’s low number, and would even expect to see it in the low teens.
The other indicators, called “internal indicators,” like Moving Average Convergence/Divergence (MACD), Relative Strength Index (RSI) and stochastic, are somewhat overbought, but the momentum indicator is flat, telling us that the current market conditions are likely to continue.
Conclusion: Despite the new highs in the major indices, the rally does not appear to be “overbought” and could go much higher. The recent breakout is a major buy signal, and any profit-taking pullbacks should be used as an opportunity to load up on undervalued stocks.
Today’s Trading Landscape
There are no earnings to be reported today.
Economic reports due: ICSC-Goldman Sachs store sales, Redbook, S&P Case-Shiller home price index, consumer confidence (the consensus expects 53), and State Street investor confidence.
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