The stock market had a positive day today in response to a few piece of positive news. The Financial Accounting Standards Board loosened the mark-to-market accounting rules which some say have severely hurt banks over the last year. Plus, Factory Orders came out better than expectations which increased optimism. The last piece of significant news today was that the European Central Bank cut its interest rate target.
From a technical perspective, the NASDAQ (chart below), which has been the leading index in the recent rally, hit two-month highs today. The NASDAQ is commonly believed to be a growth index. It broke above the resistance of 1600 and is approaching the next area of resistance its Jan. highs at 1665. Volume was robust which makes the move more significant. The recent rally has shown some bullish characteristics: Upward moves in the market have been on increasing volume and pullbacks have been on lighter volume. That means major market players (Pension, Mutual, and Hedge funds) are participating in the market more on the upside and when the market sells off it does so with less selling pressure.
Historically when the stock market comes out of a bear market the leading sectors will usually be growth oriented sectors. The stock market being a forward looking mechanism will anticipate what lies ahead and if you are currently in an economic contraction the next part of the cycle will usually be an expansion. Growth stocks usually perform well with the perception of upcoming expansion in the economy, thus if growth sectors lead it’s usually a bullish sign. Some of the growth sectors that have recently broke into new 4-month highs are Technology (chart below), Retail (chart below), Semi-conductors, Telecommunication and Internet Commerce.
Before the market opened today there was a very weak jobs report. The market initially reacted negatively to this report and to the fear of more potential bank failures. Bank of America at one point of the morning got as low as $3.77, down almost 20%! The Dow Jones Industrial Average had broken below support and it appeared that the market was ready to go into a new freefall that could of lead to huge losses. But, at around 10:30am the market decided it had gone down low enough and the market began to reverse and head higher. By the end of the day the market had rallied about 3% from it’s lows to post a decent gain on high volume. And Bank of America rallied approximately 30% from it’s lows to close up around 6% on the day. Psychologically if the market rallies on bad news it is considered positively constructive action. Because it means the market is looking forward to potential improvements while at the same time shrugging off or discounting current economic bad news. It is important to know that the market leads the economy and almost always starts to go into a new bull market before the economy improves.
The NASDAQ (pictured below) was the clear leader today. It posted the highest volume day in nearly 2 months which adds validity to today’s move. From a longer-term point of view the NASDAQ along with the other major U.S. indices have formed a potential upside-down Head & Shoulders pattern. The significance of this pattern is if the NASDAQ is able to close above the blue downward sloping trend-line that is drawn in this picture at around the level of 1600 that would significantly improve the NASDAQ and the other markets probability of a reversal in the current down trend. Some individual sectors like the Bio-Techs, Semi-Conductors and Software indices have already broken above this reversal pattern. These sectors are providing something the market has lacked for a long time…Leadership! Today’s action does not eliminate the possibility for further downside moves; it simply means that it was one positive day and a step in the right direction.
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