Volatility Levels Favor the Bulls
Yesterday stocks blasted from the gate after a handful of better-than-expected economic data and a surprising earnings gain from Ford (F) were announced prior to the opening. By 11 a.m., the Dow Jones Industrial Average (DJI) was up almost 150 points. However, around 11:15 a.m., insurers stumbled and worries over consumer malaise ended the rally. By noon, most of the early gains had vanished. (Check out Sam Collins' Trade of the Day here)
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The bevy of economic reports included the ISM Manufacturing Index for October, which came in at 55.7, or 2.7 points above estimates. Construction spending in September spiked 0.8%, which was much stronger than the anticipated decline of 0.2%, coming in at 55.7 versus an expected 53.
Topping off a perfectly wonderful day of reports was one showing an increase in pending home sales for September, which was up 0.8% compared to an expected flat reading.
By 1 p.m., stocks had lost their momentum and the S&P 500 failed to penetrate its 50-day moving average, a number that was promoted by the media as being an important barrier for the broad-based index.
So when CIT Group (CIT) announced its bankruptcy, the market was already geared to pull back from its early gains.
The Nasdaq (NASD) fell in the early afternoon following a downgrading of key technology stocks by Citigroup's (C) analysts. Research in Motion (RIMM), Motorola (MOT) and Intel (INTC) were all downgraded and all participated in an early afternoon sell-off.
A late rally completed a swing of 180 points and was led by consumer staples and consumer discretional stocks. Ford rose more than 8% and Humana's (HUM) better-than-expected earnings sparked a rally in managed-care providers that took the group higher by 1.5%, even though Humana closed lower.
At the close, the Dow was up 77 points to 9,789, the S&P 500 (SPX) closed higher by 7 to 1,043, and the Nasdaq was up 4 points 2,049.
The NYSE traded 1.5 billion shares with advancers ahead of decliners. On the Nasdaq, 795 million shares traded and decliners were slightly ahead of advancers.
Buoyed by better U.S. economic reports, December crude oil rose $1.13 to $78.13 a barrel, and the Energy Select Sector SPDR (XLE) gained 35 cents to $55.60.
December gold gained $13.60 to end the day at $1,054 an ounce, resulting from pressure on the U.S. dollar by China and Europe. The PHLX Gold/Silver Index (XAU) gained $1.61, closing at $158.25.
What the Markets Are Saying
It seemed like last spring instead of this fall yesterday, as volatility swung the major indices like a pendulum. This sort of high-velocity trading was expected following a week of higher numbers from the CBOE Volatility Index (VIX), especially following Friday's big five-point hop to above 30. And despite the lower close by .91 to 29.78, the index is still at the highest level since late June.
It was said both in the Wall Street Journal and on news broadcats that one of the reasons that stocks reversed from yesterday's intraday high was that they had hit a "technical barrier at the 50-day moving average." That could be the first time I've heard any major public media point to a "technical barrier," and it makes me feel just a bit uneasy -- a "too many cooks spoil the broth" sort of thing.
Some technicians are calling for a head-and-shoulders reversal (here we go again) despite the fact that a right shoulder hasn't even begun to form. And if it had, volume doesn't support that conclusion at an early stage of development.
I certainly wouldn't want to see the S&P slice through the bottom of the current support zone at 1,020, and think that is unlikely for now. This sort of flaccid reasoning coupled with the commentators' focus on "technical barriers" and the VIX could create even more volatility.
After yesterday's "jump around the clock," our internal indicators are oversold by a wide margin and the Relative Strength Index (RSI) is at the lowest since July. All of this tells us that the next move will most likely be to the upside as higher volatility benefits the bulls and chases the bears back to covering their shorts. But don't underestimate the significance of the S&P support line at 1,020. Everyone is focused on it and, if broken, the next support zone is at 980 to 1,010.
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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.
Get more on Today’s Trading Landscape here.This article was written by Sam Collins, OptionsZone.com's chief technical analyst.
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