Blue-chip and technology stocks led the market to its second big gain yesterday. An increase in private sector hiring and a more serious coordinated action to recapitalizeEurope’s banks brought buyers into the financial sector late in the day, assuring a gain for the session.
But volume on the NYSE fell to 1.2 billion shares compared to Tuesday’s 1.7 billion. Advancers were ahead of decliners by almost 3-to-1 on both exchanges.
Tuesday’s odd reversal is difficult to take seriously as a major trend change. Reports from NYSE floor traders suggest that it was triggered by better news from Europe that coincided in time with the market’s plunge to S&P 500 1,075, the heart of last summer’s trading range.
This is the major support area that we have often discussed and had even highlighted 1,070 as a possible support number on Tuesday’s Daily Market Outlook. And it is a number that the high-frequency traders could have already plugged into their machines.
The incoming volume then triggered those who were short (short interest was very high) to cover, and so an abnormal acceleration of buying occurred. The question now is will the reversal stick?
Thanks to Michael Ashbaugh for pointing out that with the S&P falling sharply to new lows, the CBOE Volatility Index (VIX) failed to make a new high, which is very odd in that the VIX almost always reacts with a new high in an unusually high volume sell-off.
And under the circumstances breadth was not very high at just 6-to-1 in comparison to Monday’s fall, which drew negative breadth of 30-to-1.
And there is one other unconventional characteristic: The bulk of the volume was established near the lows of the day rather than at the beginning and then building to a climax.
Conclusion: Tuesday’s reversal and modest low volume follow-through on Wednesday, combined with the odd nature of the reversal, are convincing enough to say that the bear is still very much in charge and that in very short order he will show his teeth again. My guess is that the current rally will run out of steam somewhere near the midpoint of the bearish flag, which is at S&P 500 1,170. (Find out how to play it.) But the 20-day and 50-day moving averages also provide important resistance.
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.