Today we have a small gap up on our hands, following strong earnings reports from Oracle (NASDAQ: ORCL) and Research in Motion (NASDAQ: RIMM). The question begs whether the upside breakout can gain some legs and follow-through into a constructive rally. This afternoon is both Quadruple Witching (options expiration) and the start of Yom Kippur, so I would not necessarily expect much in this one day; however, this morning’s action will help provide another clue as to the next move this market will make.
In each of the last three days, the market gapped down. Two days the move was on modestly bad news, and the third was on a modestly good jobless claims report. Each of the three days the market traded up to close at or near highs. I take that as a sign that people want to buy stocks. The gap downs occur with no actual selling in the indices underlying equities, and as soon as markets open up, people proceed to buy up individual equities. Again people are fretting over the lack of volume, however it’s important to remember two key points: first is that overall market volume is down over the past year, and second is that people don’t rush into markets the same way they panic out.
Many are comparing this rally to the one we experienced through July that culminated in a dramatic August decline. To me, this particularly rally feels very different. The key distinction is that as we pause here, correlation is starting to die down. When the S&P was flirting with 1120 in early August each night I cycled through my baskets of stocks, everything predominantly moved in the same direction. Meanwhile, over these last few days for the S&P, the leaders one day have been the laggards the next, and the laggards one day, the leaders the next. The strong stocks digest and the weak ones catch up.
Perhaps most telling for me at the moment is the fact that this market’s leaders are back into their leading positions. There’s been follow-through on the dividend announcements in the Tech sector (first was Microsoft, then Cisco, with what could be more to follow) have propelled the group in recent days, and Apple (NASDAQ: AAPL) once again assumed its leadership position in breaking through the $270 resistance area yesterday. Once Apple pushed through the market climbed on board for a strong afternoon close.
Of note in the Apple chart is that in the early days of August, as the market was consolidating the sharp July rally, this leading stock was sitting below it’s breakout zone and moving sideways. Yesterday, as the market moved sideways, Apple surged through an important technical level. While this does not mean the market has to follow, it is a key indicator.
And lastly, one of the key differences this time is that Treasury yields are in fact rising again, rather than consolidating. In early August, the fear of a double-dip recession was a palpable factor in driving equity price action. Now, the drop off in the TLT provides a clue into the market’s much calmer and more comfortable position with the state of the economy. Warren Buffett even went on record as saying a double-dip is not in the question. All this bodes well for equities moving forward.
Disclosure: No relevant positions in stocks in this article.