U.S. stocks jumped from the opening as better economic news and more stable European markets encouraged investors to trade in safety for equities and better performance. And where just a day before the headlines spelled doom and gloom, yesterday’s pre-opening economic reports were all positive.
The latest ADP employment change data showed that private payrolls expanded by 93,000 in November versus an expected increase of 58,000, for the best improvement in payrolls in three years. The Q3 productivity report showed that non-farm productivity increased by 2.3%, up from Q2’s 1.9%, but just a bit off of the 2.4% expected. And construction spending increased 0.7% versus the consensus of a 0.5% decline.
The announced improvements in the U.S. economy had much to do with the opening rally, but even more buying came about as a result of better economic data from both Europe and China, and strong markets in both areas. Comments from European Central Bank President Jean-Claude Trichet seemed to stifle fears of more debt contagion in the euro zone.
The ECB said that it will take more assertive action focusing on the nations that are slower to participate in a recovery. At one point, a rumor spread that the U.S. Federal Reserve would also be coming to the aid of Europe, but that was later denied.
A report from Goldman Sachs Group, Inc. (NYSE: GS)? said that the growth outlook “has brightened significantly in recent weeks.” And Goldman’s economists raised the growth outlook for 2011 to 2.7% from a previous estimate of 2% with a “meaningful drop” in the jobless rate to 8.5% by the end of 2012.
As a result of the sudden splurge of good news, the markets surged forward from the opening bell and continued throughout the day. At the closing bell, 96% of the stocks in the S&P 500 had advanced, and safe havens like the U.S. dollar and Treasurys took a hit. The 10-year note’s price fell, and the yield rose to a four-month high of 2.964%. The euro climbed above $1.3137 versus $1.2981 on Tuesday.
At the close, the Dow Jones Industrial Average had jumped 250 points to 11,256, the S&P 500 rose 19 points to 1,206, and the Nasdaq gained 51 points at 2,549. The NYSE traded 1.1 billion shares with advancers ahead of decliners by 3.67-to-1. On the Nasdaq, 592 million shares traded with advancers ahead by 2.5-to-1.
Crude oil for January delivery rose $2.64 to $86.75 a barrel, and the Energy Select Sector SPDR (NYSE: XLE) gained $1.86, closing at $64.57. December gold gained $2.30 to settle at $1,387.30 an ounce, and the PHLX Gold/Silver Sector Index (NASDAQ: XAU) rose 4.3 points to 217.47.
What the Markets Are Saying
“What a difference a day makes, 24 little hours,” so goes the song. Just a short time ago, Asian markets took off on news of a strong manufacturing report from China. That was followed by strong U.S. economic reports before Wednesday’s opening bell, and a market reversal in Europe as they appeared to be getting a handle on their debt.
This is the most volatile and headline-driven market that I’ve observed in 44 years of analysis. The result: Within just hours of the submission of yesterday’s Daily Market Outlook, its conclusions were already out of date.
What could cause such extreme volatility and a massive reversal of stocks in just hours? It is simply that today’s very volatile markets are now in the hands of short-term institutional traders, day traders and hedge funds. And much of the money is coming from dealers of Treasurys by the Fed’s Permanent Open Market Operations (POMO).
Additionally, public buying, which was formerly the market’s “cushion,” has dried up. This is a phenomenon that developed from the public’s massive losses in back-to-back bear markets and their subsequent withdrawal from the markets. With fewer investors now willing to put their savings into long-term equity investments, the absence of this formerly predictable and steady flow of the investing public’s money has led to increased volatility, and traders now control prices.
What to do about it?
First, please note that my market comments are the result of my own observations over many years, and no one puts pressure on this writer with regard to his opinions. Also, my reports are typically submitted the prior evening, so sometimes the early morning news is at odds with my short-term trading recommendation. In the future, we will bring you an update when before-the-bells news alters the trading outlook for the day.
Also, please make note of the fact that technical analysis is not predictive; it is responsive. So, as with fundamental analysis, we sometimes get it wrong. That is why I repeatedly remind our readers place protective stop-loss orders on all trading positions at the time of purchase. It is also why I will, when practical, advise readers to take positions only after a certain event occurs. For example, in yesterday’s Trade of the Day, I said, “The trade would be triggered by either a close below S&P 500’s 1,174 line or a break by BGZ through $11.”
Now, for the present. Yesterday’s impressive rally, in just minutes, vaulted the major indices from the major support at S&P 1,174 to less than 4 points from the major resistance line at 1,210. The rabbit was pulled out of the hat, and for now the market has again turned north — but only for the short term. Upside volume was less than Tuesday’s downside volume by a wide margin, and yesterday’s good news can easily turn sour tomorrow. Also, first day of the month rallies frequently have weak follow-through.
But the bulls are in charge again. Let’s see what they can do with their newfound power.
For one stock that should deliver solid returns, see our 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
