What the heck is driving stocks?
- Market remains just as volatile as last week, but again the buyers return, preserve the breakout, and drive stocks back up after an early decline.
- Durable goods orders solid ex-transportation.
- New home sales rise 5.7% in September thanks to prices hitting 12 month lows.
- What the heck is driving stocks?
- Now the breakout is tested we see if it can extend the move.
Down again, up again, but the buyers return again.
Tuesday cast doubt upon the breakout move given the ‘all in one day’ test. Wednesday futures were up on some decent durable goods orders ex-transportation at 1.7%, the best in 6 months, some more good earnings from PNRA, BA and friends, and Germany’s vote to back the most recent bailout iteration, whatever that may turn out to be. Looked good for the breakout move to continue after the Tuesday selling.
It did. Then it immediately sold negative into midmorning. Not a great look with the failed bounce attempt off the Tuesday selling. This even as New Home Sales topped expectations, moving up 5.7% with inventories dropping to 6.2 months. A 3% drop in prices to the lowest level in 12 months as homebuilders slashed prices help move inventory. That is exactly the way it should happen and the market would likely have already cleared if prices were allowed to drop without attempts to prop them up. Oh well, the path not taken due to good but misguided intentions.
Then came salvation though the exact reason is not that clear. Of course that implies every market move is for a specific underlying reason. Yes the market responds to individual stories, but overall it tends to move with broad themes. Right now that broad theme appears to be at least a near term comfort level with US economic activity and some plan to come in Europe.
Thus stocks held the breakout on the selloff to midmorning, broke higher, and by early afternoon the NYSE indices were leading the market higher into positive territory. The rebound tested and when a higher low held, the move was on with stocks rallying to close near session highs.
NASDAQ 12.25, 0.46%. SP500 12.95, 1.05%. DJ30 162.42, 1.39%. SP600 1.8%. SOX 0.54%.
THURSDAY
Jobless claims, GDP, Pending home sales, and earnings. Oh yes, more European intrigue. Any of those can hold sway.
Then there is the technical picture overall. The market broke higher through the August/October range, tested, and on Wednesday bounced upside on rising trade. That is what you want to see, along of course, with well-positioned stocks breaking higher as well.
Speculation each day is what will move the market. Hope of an EU fix is there each session. Better US economic data the past three weeks helps as well. While there are some earnings disappointments and this week saw some disappointing guidance from big names (e.g. MMM, CMI, X) and overall Q4 warnings are running higher, many stocks are touting the fourth quarter. Seasonal activity is also a key component: October is a month stocks typically bottom and rally with techs leading the way. Lo and behold, techs started this move, making the first breakout from the trading range.
An added component: there may be some funds chasing gains to year end. As noted, there is seasonal activity that pushes stocks in a Q4 run. Many funds did not see that happening this year and are in the uncomfortable position of trying to get into the market before it gets away. That, on top of the seasonal pattern, can add a powerful upside component to the market.
Does that mean we are expecting a breakout over the April peaks? Nah. Even with the bounce in economic data the activity likely is not a turn in the data, just a bounce. ECRI still says a recession is baked in at this point and the poor guidance from some important companies suggests that is the case.
That still does not mean the market fails to rise in the near term. Breakout, good patterns, some near term reasons to rally. Technically decent for a bounce and some fundamental reasons as well. There is room to move up in the range without having to make a breakout and that movement makes us money. That is why we are buying on this move even though ultimately we believe it fails at or before the April highs. You have to follow what the market does even if you don’t believe the move will hold; the market has a way of proving you wrong. Then if you are wrong about the extent of the move and there is a breakout, you that didn’t expect the breakout are pleasantly surprised.
