Curbs In & Buyers Back
Benign inflation data and faith in the Fed. Today was a big reversal day and the breakout in the Dow & SPX.X has established a new trend. Who would have thought after yesterday's closing failure? If you didn't catch the bottom for fear of getting burned, you gotta be thinking here that this rally is safe to jump onto. We got side-blinded but who's to complain? It always feels better making money on the long side.
Given yesterday's 50 bp cut and Fed rhetoric toward fighting further economic weakness were exactly what the market wanted. However, as the euphoria wore off, concerns about what the Fed knew that we didn't filtered through and demand disappeared. The sell-off into Tuesday's close was exactly what we shouldn't have done. This morning's CPI report came in better-than-expected, 0.3% vs. 0.4%, indicating that inflation was in check. We should have known! The Fed wouldn't have given us what we wanted if inflation was a concern (considering that they get a sneak peak at most key economic data). Jim Kramer said it last night, you gotta be a buyer, gimme some MO (NYSE:MO), sell me some Schlumberger (NYSE:SLB). Today was evidence that we can trust the Fed. And big time money went to work, blowing the roof off the Dow ($INDU) and the S&P 500 (SPX.X), conquering key resistance points of 11,000 and 1272, respectively.
The Dow, indeed, looked like it wanted to go higher even after yesterday's late session selling. Its recent move off of 10774, which was last Friday's low, maintained a series of higher highs and higher lows. Sure enough, the 10800 area held strong as support today. We saw a classic intraday pattern of early accumulation, followed by consolidation along 11,000 before further accumulation and short-covering. Previous shorts got squeezed hard, having to pare losses. But the big deal is that we now have a lot of new money committed to long positions above 11,000, surely to be defended. After today's massive 342 point day, the fifth biggest point gain ever, it wouldn't be a surprise to see some short-term profit taking. You can be sure that a pullback won't last long with the conviction and underlying support from this new money. A pullback will offer good entries into quality names like MO, Caterpillar (NYSE:CAT), Dupont (NYSE:DD), and United Tech (NYSE:UTX). Hey, we're in a stealth bull market!
Key to the $INDU breakout today was the Cyclical Index (CYC.X), which I mentioned in the Market Sentiment last week. The downtrend line from May 1999 was broken today with a 4.28% parabolic gain. The last time we had a similar technical development on the CYC.X along with a breakout, the Dow ran from 10173 to 11130 between April 4th and May 9th, 1999. This move in the CYC.X and the $INDU, in conjunction with an extremely aggressive Fed, gives a strong bullish signal. Deep cyclicals and Financials will lead this market throughout the next six months. Yesterday represents the fifth 50 bp rate cut, totaling 250 bp since January, and EVERY time the Fed cut five times like that, the market was higher a year later. There have been five occurrences like this and three of them resulted in double digits gains after a year.
An interesting development today was the implosion of volatility, again. Today's move took the VIX.X below 25 briefly and settled at 25.13. It could indicate that the VIX.X is returning to its normal trading range roughly between 20 and 30, and if the Dow continues to push higher, this very well may be the case. We saw a similar implosion back in January during the initial post-Fed rate cut rally, only to sell off again. This time feels different. The Fed has since cut an additional 150 bps and the Dow is much more technically sound. It's the Nasdaq that, while not unstable, doesn't have the relative strength.
The Nasdaq has concerns of its own. It is still in a recovery mode after hitting 1619 on April 4th. Bottomline is that the Nasdaq incurred tremendous technical damage over the past year and capital expenditure forecasts for tech companies remains in question. Money is certainly cheap and going to get cheaper but these companies are still gauging how overbuilt they may be. Tomorrow's earnings reports from Ciena (NASDAQ:CIEN) before the bell and Dell (NASDAQ:DELL) after the bell will give guidance to the tech sector. Ciena will likely set the tone tomorrow.
Technically, the Nasdaq is still bouncing around its recent trading range between 2000 and 2250. Support at the 2060 area was tested early after the open today and the Nasdaq quickly moved toward 2100. Following a brief consolidation along this level, the Nasdaq took off into the close, finishing up 80 points to 2166. We saw a reversal today and momentum tomorrow should carry the Nasdaq to a challenge of immediate resistance at 2200. It will be all about Ciena's guidance going forward, especially considering that they have guided higher consistently.
Today gave us a technical breakout and a shift in sentiment. Let's run with the bulls. We gotta buy the Dow via strong Cyclicals and Financials. Tonight we added Merrill Lynch (NYSE:MER) and General Electric (NYSE:GE), looking to participate in the new trend in the Dow. Ideally, we are looking for a profit taking pullback near support to enter. The Nasdaq will probably follow suit, but keep in mind resistance overhead at 2200 and its ultimate challenge at 2250. The SPX.X also broke above its long time bullish wedge at 1272 handily, posting a 35 point gain. I will talk more about key levels on all the indices tomorrow in Market Sentiment. Until then, we're looking to Ciena's comments in the morning as well as Initial Jobless Claims expected to be 395K. Today was a pivotal point for market psychology, but remember that nothing goes up forever. Trade what the market gives you.
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