Bulls Break Out

All three major equity market indices posted impressive gains yesterday with the Dow Industrials leading the way with a gain of 1.87%.

The S&P 500 gained 1.66% and the NASDAQ gained 1.65%. This was an earnings driven rally for the most part. Nearly major market sector gained meaningful ground in a session that was defined by rising prices coupled with expanding volume. The NYSE saw volume expand by a hefty 20.91% while the NASDAQ’s volume grew by 7.23%. Better than expected earnings and guidance from names that have enormous weight did the heavy lifting:  MSFT (after the close), AMZN (after the close), MCD, and Google (after the close) all delivered results that triggered the best one day performance in the major indices in quite some time. As a result of yesterday’s charge higher, the S&P 500 closed at a two month high of 2052.51.

Buttressing the earningscentric move higher in equity markets yesterday was news from the ECB’s Mario Draghi the rates would remain unchanged and that inflation remains tepid in the EU economy. The resultant furtherance of QE weakened the Euro while strengthening the dollar on a relative basis. European markets responded to Mario Draghi’s comments with a broad advance. That advance did set the stage for our rally.

Markets closed at or near their highs of the session. In the case of the NASDAQ, it closed just below its 200 DMA. As I have suggested this is the litmus test for a meaningful and sustainable rally. Given the earnings we received after the bell and the strength in Asian equity markets in the overnight, I suspect we pass that litmus test today. The S&P 500’s close at 2052.51 was also just short of its 200 DMA. Again, we should see some follow through today which will allow for a close above the “litmus” test. Lastly, the Dow industrials closed at 17,489.93, fractionally below its 200 DMA as well. From the profile of yesterday’s rally and the follow through in overseas markets, we should see a rally that leaves all three majors clear their 200 DMA today. Incidentally, the Dow Industrials are now positive (+0.05%) for the year with yesterday’s close. The S&P 500’s YTD performance is +1.35% and the NASDAQ’s performance over the same period is +4.92%.

Lastly, the People’s Bank of China just announced further interest rate cut reductions effective tomorrow in addition to further reductions in reserve requirements for banks.

As you know, my cautious tone in recent weeks has been predicated upon lackluster economic growth, below target inflation, interest rate uncertainty and expectations for Q3 results that underwhelm. Much of that has held despite yesterday’s earning’s driven rally. However, as you also know my reliance on technical data within the market does inform/confirm my take on market trend. A meaningful break above the 200 DMA today by all three major equity market indices would trump much of my data fueled caution.

photo @thomashawk