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Dead Cat in Bull's Clothing?
5/11/2010 7:45:00 AM
By: Sam Collins
The U.S. stock market jumped 3.9% on Monday, following a deal by the European Union ( EU ), the International Monetary Fund ( IMF ) and the European Central Bank ( ECB ) to bail out not only Greece but other European countries, as well. The $955-billion program resulted in broad gains in Europe's major indices and set the stage for the strongest opening in U.S. stocks so far this year.
It was reported on CNBC that even before our stocks opened the ECB had already been buying eurozone national bonds to inject capital into their system. And it was generally conceded that, despite the long-term costs, the move avoided the dreaded contagion that spooked the markets last week.
Stocks were strong during the entire session with all 30 of the Dow Industrial components gaining. The strongest movers in the Dow were Caterpillar Inc. (NYSE: CAT ), up 7.39%, General Electric Company (NYSE: GE ), up 6.99%, Bank of America Corporation (NYSE: BAC ), up 6.98%, The Boeing Company (NYSE: BA ), up 6.85%, and Cisco Systems, Inc. (NASDAQ: CSCO ), up 6.19%.
On the broad market, industrials gained 5.7%, financials rose 5.6%, consumer discretionary was up 5.3%, and technology gained 5%.
But despite the gains, there were many who said that the sharp jump in prices was just a relief rally. And other joined in pointing out that there was evidence of mass short covering . But more than 98% of the stocks on the S&P 500 ( SPX ) rose and drove the index to its best gain in more than a year.
The NYSE traded 1.9 billion shares with advancers over decliners by almost 10-to-1, and the Nasdaq crossed 839 million shares with advancers ahead by 7-to-1.
Crude oil for June delivery rose $1.69 to $76.80 a barrel, and the Energy Select Sector SPDR (NYSE: XLE ) gained $2.35 to close at $57.34.
June Gold fell $9.60, closing at $1,200.80 an ounce. The PHLX Gold/Silver Sector Index (NASDAQ: XAU ) fell 2.71 points to 171.88.
What the Markets Are Saying
What a ride it has been since last Tuesday's (May 4) mild pullback of "just" 225 Dow points. We pointed out in Wednesday's Daily Market Outlook that our proprietary internal indicator, the Collins-Bollinger Reversal ( CBR ), had given a strong sell signal, and that a number of other indicators were telling the same story: sell.
On Wednesday, I said, "Yesterday the coup de grace was administered when the S&P 500, Nasdaq and NYSE Composite broke cleanly through their respective 50-day moving averages … The goal of this correction is nothing less than a test of the January/February low at 1,044."
But I was as surprised as everyone else that the test of the February low would take just two days to be accomplished, leaving everyone shell-shocked by Friday.
Now, with a big rally under their belts and Greece saved by the wealthier nations of Europe, the bulls are bellowing that the crisis is over. Stocks must surely revert back to the primary trend, which is up.
Well, hold your horses, cowboy. It seems to me that history is replete with dead cat bounces that were nothing more than short covering rallies.
Yesterday's volume was high by 2010's standard, but low compared to the declining days since the breakdown last week. Since May 4, the NYSE had four straight days down with a total volume traded of 8 billion shares. However, it is true that in the last two hours of both Thursday and Friday, there was some buying.
So let's say that instead of 8 billion shares, sellers accounted for just 6 billion shares. Yesterday's 1.9 billion, 80% of which was "up volume," or 1.5 billion shares, hardly compares with an estimated total of 6.4 billion shares traded down since last Tuesday.
Now with the major indices approaching significant overhead resistance, the bulls will have to put together a major advance. The barrier that they face first is at the 50-day moving averages at Dow 10,846, and then the top at 10,875. For the S&P 500, it is the 50-day at 1,172 coupled with the top at 1,170. The Nasdaq must first face the overhead at 2,320 to 2,421 and the 50-day within that zone at 2,412. (Learn more about the major indices' trading zones .)
Today the stock market may tell us just how good or bad the news from Europe really was.
Today's Trading Landscape
Earnings to be reported before the opening include: Allot Communications, BPZ Energy, Church & Dwight, Cobalt International Energy, CommVault Systems, Delta Petroleum, Fossil, GeoResources, Invesco Mortgage Capital, JA Solar, Maidenform Brands, NeuroMetrix, Nice Systems, Northgate Minerals, Origin Agritech, SmartHeat, Susser and Winner Medical.
Earnings to be reported after the close include: A123 Systems, American Science & Engineering, Archipelago Learning, Carrol's Restaurant Group, China Digital TV, Ctrip.com, Electro Scientific, Electronic Arts, Exelixis, Given Imaging, Home Inns, I.D. Systems, Learning Tree, OPNET, Rick's Cabaret, Seaspan, STR Holdings, SunPower Corporation, Team Health Holdings and The Walt Disney Company.
Economic reports due: NFIB Small Business Optimism Index, ICSC-Goldman Sachs store sales, Redbook and wholesale trade.
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