Will the Markets Hold or Roll Over?

Will the market hold, or will it roll over. The markets made a comeback during the last hour of trading, with the DOW making the biggest reversal. Mega caps outperformed the broader stocks and the DOW ended up 1.26%, and the S&P ended up 1.1%

All three indices bounced off the support levels of May 25th, with the DOW bouncing off 9800, but the quality of the rebound was mixed. Volume on both the NASDAQ and the NYSE increased, which is a positive sign. You always want expanding volume in a "recovery rally." Volume on the NYSE was up 13% and the NASDAQ was up 20% from Monday.

Internally demand on the NYSE was stronger with 74% Up Volume and breadth 1.5 to 1 positive. On the NASDAQ, however, Down Volume was 65% and breadth was 1.5 to 1 negative. Therefore, we got somewhat mixed signals and we usually get a more definitive "bounce" off a sustainable rally.

There is even speculation that the President's Working Group on Financial Markets, established by executive order by Ronald Reagan, better known as the "Plunge Protection Team," may have had a hand in the turnaround. This is because of the unusual volume and strong reversal and subsequent rally in the last hour of the day WITHOUT any positive news. If true, it was done at the end of the day, right at a support level for maximum effect and to make people take notice.

Bottom line, whatever the reason for the increase in buying, prices dropped enough to generate interest. What does this mean for you as an investor? Watch for the ability for the markets to follow through on the advance yesterday. Especially with the markets move up and bump up against overhead supply.

This would be 9950 to 10,000 on the DOW, 2190-2220 for the NASDAQ, and 1065-1070 on the S&P. If we break through these resistance levels, it means demand is strong and this rally is for real. I have attached a graph of the DOW for you to look at and see if you can see what I am talking about.

What am I doing. I have some US equity, but have a lot of cash. I am being more conservative for the moment until the market gives more clarity. Sometimes, when you are unsure, doing nothing (sitting in the money market) is the best thing, and is actually doing something, preserving principle.

I have some US equity and a lot of cash, and am waiting until the market gives up a little more clarity as to the direction it decides to take.

Keep studying,
Dan Stewart CFA®