Greetings Shark Investors:
Although the early part of Wednesday’s trading session was bumpy, buyers got on their horse mid-afternoon to push the market into positive territory and allow the averages to build on the previous day’s big gains. Following what was by any measure a very strong day for the bulls, indications were for a lower start to the day as market players considered another round of mixed earnings reports.
As we approached the bell, investors were bidding shares of CSCO higher after that company beat earnings estimates by a penny and maintained their guidance for the rest of the year. However, sentiment was dampened on news that PCLN said that gross bookings for the third quarter would not grow at the pace Wall Street was expecting (even though they beat both top- and bottom-line estimates and increased its guidance) while WFMI missed just about every metric imaginable. Financials were also in focus early on after FRE lost $1.63 per share (versus an anticipated loss of $0.41), cut its dividend by 80% and more than doubled its provision for credit losses.
As such, the market opened the day modestly lower, and spent the first hour of the session in a narrow trading range as traders awaited the weekly oil inventory report from the Department of Energy. Although crude prices initially moved higher following an unexpected 1.6 million barrel rise in crude inventories (versus expectations of a 100,000 barrel build) and decline in gasoline inventories of 4.3 million barrels (versus an expected 1.1 million barrel decrease), the commodity quickly reversed, falling once again to multi-month lows at under $118.
That turnaround allowed the market to move off what would turn out to be the lows of the session, with the Nasdaq moving into positive territory while the Dow and the S&P 500 hovered right around the unchanged mark. Although the market was unable to make much progress for the next few hours, a wave of broad-based buying kicked in about two hours before the close, pushing each of the averages well into the green. Although they finished a bit off the highs, the indices ended the day with average gains of 0.63% on positive breadth but decreasing volume. Probably the most interesting aspect to the day is that the upside follow-through we saw came despite a reversal of yesterday’s leader/laggard relationship. This time around, it was energy and materials which led the market higher while financials and consumer discretionary lagged. The one standout, however, on the day was tech, which added another 1.41%, bringing its three-day advance to just under 4%. Also, defensive names were strong once again, as consumer staples gained 1.07%.
We mentioned in our last Stalking Stocks newsletter that yesterday’s rally had placed the bulls back in the driver’s seat and had set the market up to put in another higher low. The question, however, was if the averages would be able to move past the short-term resistance levels defined by the recent high two weeks ago. While the Nasdaq was able to do just that, albeit on a down-tick in volume, both the Dow and the S&P 500 are still bumping up against those levels.
Be that as it may, the short-term technical conditions in the indices favor more action to the upside, and the issue is quickly turning to whether or not investors will start to feel like they might miss out on another playable counter-trend move if they don’t start putting pulling some of their capital in off the sidelines. Despite all of the problems facing the economy, we’ve seen a handful of such bounces develop over the past several months. With investors shifting their focus to different areas on an almost daily basis, it’s going to take some hard work if that’s going to happen. Difficult, however, doesn’t mean impossible.
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Let’s go to the charts.
The Nasdaq popped higher during today's trade on decreasing volume. Technology names saw improved action as GOOG and RIMM surged higher. The index is back over the 50dma, but still has resistance looming around the 2400 area.
The S&P 500 edged higher during today's session on decreasing volume. Financial stocks struggled for traction today as GS and MER lacked a bid. The index is acting better, but still remains below its 50dma.
The Russell 2000 inched higher today and took out recent highs. The index continues to show impressive relative strength. Small Caps in general are beginning to see some life and we will be watching for further follow-through.