(By Greg Guenthner) The stock market's reaction to news is more important than the news story itself–no matter what.
If you can wrap your mind around this simple concept, you will have the opportunity to profit from key market turning points before the crowds of other market watchers catch on…
It's not that financial news is unimportant. It is. Unemployment, home construction numbers and manufacturing data all give us an in-depth look at the health of the economy. But no matter how plentiful and accurate the data might be, price action is king.
Yesterday, Institute for Supply Management (ISM) manufacturing numbers came out–and they were considered by many analysts to be god-awful. The ISM report missed estimates and fell into "contraction territory" for the first time in three years, according to Fox Business.
The data sparked plenty of recession talk in the financial media. On the surface, arguing an economic slowdown and more pain for the markets appeared perfectly reasonable.
However, several key indicators are telling a very different story:
The major indexes quickly recovered and pushed higher – Stocks looked poised to give back gains from Friday's powerful rally early Monday morning. The gloomy ISM numbers provided the perfect excuse to sell–and the shock initially took a bite out of the indexes. But investors swooped in and bought back shares, pushing the market back into the black.
This reaction is important for two reasons. First, investors bought in the face of bad news–a very good sign that shows us the market's move off its June lows could have legs. Next, this strength appeared immediately after one the biggest days for the market all year. Buyers are clearly in control when they are willing to push up prices on the trading session after such a massive push higher.
Market breadth points to broad, sustained buying – On the surface, Monday's gains paled in comparison to Friday's monster rally. But the sheer number of advancing stocks across multiple sectors showed us one of the best advance/decline readings of the year. That means that yesterday's small rally was actually a rising tide. And nearly every stock on the market received a boost.
More than 2,100 members of the New York Stock Exchange posted gains yesterday, compared to only 900 decliners. Of all NYSE-listed stocks, 270 hit new highs, with only 5 hitting new lows. Even the more volatile NASDAQ posted similar numbers, with more than 170 new highs, compares to just 30 new lows.
Small-caps are taking on a leadership role – Smaller stocks are normally a great bellwether for the market at-large. Because they are viewed as riskier investments, they tend to sell-off before their larger counterparts. They also tend to lead markets higher as investors once again become more willing to take on risk.
Right now, we're seeing small-cap outperformance across the board. Take a look at the recent performance of the Russell 2000:
The small-cap index has surged higher for three straight sessions. The Russell was also the first index to top its June highs on Friday–with the S&P 500 waiting until late this morning to best its June highs…
It's easy to see that these three indicators are calling for a stronger market this summer. Now is the perfect time to start scanning the market for new breakouts. If the buying continues, we could see prices squeeze even higher in the coming weeks.