For all the telltale signs of weakness that have been scattered about the market in recent days, yesterday was quite the counter trade. All three major US equity indices not only gained meaningful ground in what has been a weak market in recent days but did so with impressive strength. I, for one, was pleasantly surprised given the headwinds that have taken shape.
On several occasions this week I have pointed out the critical importance of breaching the 50 DMA as a litmus test for any meaningful and sustainable move higher in equity prices. And as I have also made the case, that technical level has been resistance in the case of the NASDAQ. Yesterday that changed.
The NASDAQ retook its 50 DMA with conviction in the form of both breadth and volume. Winning issues outpaced losers by a 4-1 margin while volume expanded by 1.53%. Volume also rose on the NYSE by 4.18%. Even more impressive was the rebound in trade exhibited by the Russell 2000 on the day which gained 2.3%. Leadership in both indices was provided for by the Biotech sector. Though the S&P 500 and Dow Industrials closed off their intraday highs, both registered impressive gains as well. The Dow gained 218.03 points or 1.29%. The S&P gained 29.68 points or 1.49%.
Yesterday robust trade now has all three US equity indices above their 50 DMA. Despite the constructive accomplishments posted in yesterday’s trade I remain cautious for all the reasons outlined in this week’s notes. As I said on Reuter’s Insider on Wednesday, my sense is that we do not enter a bear market but that a retest of sorts would not be at all unexpected. As long as we mange to avoid a 20% correction we will avoid seeing our bull market come to an end. Volatility will remain a fixture as we continue the rate hike dance and continue to deal with a slowing Chinese and global economy.
One of the factors that has provided a positive underpinning to our equity markets, despite our headwinds, has been the rally quietly taking place in Asian equity markets in recent weeks. Yesterday, the Shanghai Composite closed at a 2 month high. With investors in Chinese markets banking on a reform fueled rally, equity prices have rebounded from the lows registered in late summer. Several large Chinese based companies listed here in the U.S. posted significant gains again yesterday.
U.S. economic data also provided some encouragement to investors yesterday. The weekly jobless claims data came in better than expected and as a result posted 42 year low. Inflation for the month came in at 02%, a slight improvement over the previous month. Both data points will be used by hawks to push for that interest rate hike sometime this year.