Yesterday, it looked like it was going to be a good day with a strong market. Then the market sold off late morning and was down for most of the remainder of the day. With less than an hour left in trading, it staged a small rally and the major indices ended up marginally positive.
Seemed to be a good day on the surface. However, looking underneath at the market internals, tells a different story. The NYSE had a 61% Up Volume day, NASDAQ actually had a 52% Down Volume day. So even though the NASDAQ was up marginally, more than 1/2 of the NASDAQ stocks were down.
The broader markets were, in fact, down. Both the S&P Small Cap Index and the Russell 2000 Index were down almost 1 1/2%. As of last week, of all the S&P Industry sectors, 96% were below their 26 week moving average. The markets are extremely oversold as can also be demonstrated by both the 14 Day and 14 Week Stochastic momentum indicator. These are just a few of the many indicators with oversold readings.
Does this mean we will get a bounce, or is it an inflection point and we are entering into a bear market?
Well, today, we finally got a strong rally a good volume. In fact the market trended upwards without much pause throughout the day, and with less than a half hour left, we are approaching 5 billion shares on the NYSE. We blew through the support level we broke through last week at 1040 on the S&P and around 9770 (9800 rounded). I have attached a one day chart (today) of the Dow just going into the close so you can see the strong trend.
Currently, just before the close, the Dow is up almost 275 points, the S&P up 32, and the NASDAQ up 65. This translates into about a 3% gain give or take for all the major indices. The reading and analysis provided early tomorrow morning by Lowrys Research will almost certainly show a 90% Up Volume day on both the Dow and the NASDAQ.
What does this mean. It means you need to watch closely over the next few days and see if we get some follow through. We got our strong demand today that we needed. We still need to see some increase in demand/buying coupled with some good economic date or earnings (I would count on the economic date, but I would count on the earnings).
We will also get a "short squeeze" where all of the shorts are scrambling to cover their positions. This happened some at the end of the day today. I believe that is why you didn't see the market trail off and pull back some late in the day.
The next few days might give you an opportunity to lighten up once the momentum loses steam. Again, I believe we will have a decent earnings season, but after that, most of data point in the negative direction.
You should be thinking about cash, short term bonds, or shorting. Get you plan of action ready in advance.
Keep studying,
Dan Stewart CFA®
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