Stocks roared back from their losses of the past several sessions yesterday,
enabling the major indices to finish right at resistance of last month's highs.
After gapping higher on the open, the broad market grinded higher throughout the
first half of the day, then continued to build on its gains after the 2:15 pm
Fed announcement. As widely anticipated, the Federal Open Market Committee
(FOMC) not only left interest rates unchanged, but also avoided hinting at
future rate increases. The stock market's knee-jerk reaction was quite positive.
The Nasdaq Composite rocketed 2.8% higher, while the S&P 500 and Dow Jones
Industrial Average scored identical gains of 2.9%. The small-cap Russell 2000
and S&P Midcap 400 indices climbed 2.4% and 2.1% respectively. Breaking the
recent pattern of choppy and indecisive trading, it was also refreshing that
stocks trended smoothly intraday for the first time since July 29. All the main
stock market indexes finished at their best levels of the day.
Confirming yesterday's massive gains was a sharp spike in volume across the
board. Total volume in the NYSE swelled 13% above the previous day's level,
while volume in the Nasdaq similarly ticked 19% higher. Although the S&P 500
logged a bearish "distribution day" by declining on higher volume on August 4,
it's quite positive that stocks followed up Monday's bout of institutional
selling with a powerful round of institutional buying. It was the fifth such
"accumulation day" within the past two weeks. Since the broad market formed its
intermediate-term bottom in the middle of last month, there have been six
"accumulation days (higher volume buying)," and just one "distribution day
(higher volume selling)." Without even looking at a single chart pattern, this
ratio tells us the bulls have clearly had the upper hand recently.
Ten of the twenty-five major industry sectors we monitor on a daily basis
bagged impressive gains of more than three percent yesterday. However, very few
of these sectors have nice daily or weekly chart patterns that would excite us
to enter new positions. Most industries, including semiconductors ($SOX), are
still trading below resistance of their intermediate and long-term
downtrend lines. In this situation, one would have no reason to expect a lot of
upside potential until the sector breaks out and starts to absorb some overhead
supply. Other industries, such as banking ($BKX) and transportation ($DJT), are
stuck in choppy, sideways trading ranges that we don't want to touch.
