A confluence of events geopolitical, fundamental and technical combined Tuesday to help both stocks and Treasury bonds recover from recent losses.
Major averages were meandering early in the session with blue-chip proxies slightly lower and tech gauges modestly higher in the wake of some not-as-bad-as-feared earnings by
and cautiously optimistic guidance from
At around 11 a.m. EDT, stock proxies jumped in unison on reports Saddam Hussein's sons had been killed by allied forces, something not confirmed by the U.S. military until about 3:30 p.m. EDT.
Late morning, news services were quoting White House officials as being "reasonably confident" that Uday and Qusay Hussein were killed in a gun battle in Mosul. Having been burned before by various rumors of the death or capture of Saddam Hussein and/or Osama bin Laden, traders were initially wary. But after hitting session lows at about 10:45 a.m. EDT, all major averages rallied sharply for about 90 minutes while crude futures declined. (Crude finished down 5% to $30.19 per barrel.)
"We got down to the low end of the trading range, with the
flirting with 9000 and the news
about Hussein's sons came out," said Brad Sullivan, founder of Group 6 Trading, a Chicago-based futures trading firm. "Anyone short had to cover and there's no question that's been the driver."
was higher prior to the geopolitical developments, led by semiconductor and related stocks despite concerns about the quality of TI's earnings, skepticism about Novellus' optimism, and disappointment over
results and outlook. The Philadelphia Stock Exchange Semiconductor Index rose 3.3%.
The Comp's early strength was a sign the market was unlikely to break down Tuesday, even if the welcome news from Iraq hadn't emerged, Sullivan suggested. Nasdaq 100 futures "had fallen from 1320 to 1232 -- what more do you want?" he mused. "This was not the time to get bearish from a trading perspective."
The momentum in equities waned shortly after lunchtime amid reports of a fire at the Eiffel Tower in Paris. But when that incident proved minor, the midday boost resumed. However, confirmation of the deaths of Hussein's sons did little to aid shares in the session's final hour and major averages proved unable to surmount their midday highs.
After trading as high as 9172.88 and as low as 9037.30, the Dow Jones Industrial Average finished the session up 0.7% to 9158.45. The
closed up 1% to 988.10 vs. its intraday high of 990.29 and low of 976.08. The Comp, relatively strong throughout the session, finished higher by 1.5% to 1706.02 vs. its best of 1709.10 and nadir of 1686.20.
Tiptoeing Through the Technicals
As is often the case, the aforementioned fundamental catalysts for buying
to be accompanied by some technical indicators pointing to the likelihood of a near-term bounce.
big decline Monday left the Comp below its simple 20-day moving average and threatened to break the sharp uptrend line in place since the lows of mid-May, as I noted in
Columnist Conversation. Additionally, the S&P 500 had traded right to its 50-day moving average intraday Monday while the Nasdaq 100 had tested support at around 1240. (Both the S&P and NDX revisited those levels intraday Tuesday before bouncing.)
Lackluster volume was a mitigating factor to the technical significance of Monday's decline. Most technicians believe any technical "breakdown" must be accompanied by rising volume to be confirmed. Furthermore, the Comp's 20-day moving average and the S&P's 50-day moving average are still rising, which mitigates the impact of breaching them.
"If we break a still-rising moving average line, it isn't nearly as bearish as breaking a moving average line that has rolled over and started declining,"
Helene Meisler observed.
Finally, the Nasdaq had fallen below its 20-day moving average four times prior to Monday since the mid-March lows (including that episode) and rallied sharply thereafter on each occasion.
Given all that, the overriding sense among technically inclined traders was that stocks, especially the Comp, were due for some relief from recent selling. The question now is the quality of any short-term bounce, i.e. whether it's accompanied by expanding volume and improving breadth. (Advancing stocks led decliners 18 to 13 in
trading Tuesday, while 1.4 billion shares traded. Gainers led nearly 2 to 1 in over-the-counter activity, where 1.7 billion shares were exchanged.)
"I agree 100%" with that view, said Scott Bleier, founder of HybridInvestors.com. "Our theory
last month " -- about how a 'sell the news' reaction to
easing would send bond yields sharply higher and provide competition for stocks -- "has played out and basically capped the rally."
While the "massive breakout" has probably peaked, Bleier does not foresee a big breakdown for major averages either, forecasting major averages will likely be in a trading range through the rest of the summer. Reasons he is not worried about a sharp decline include the Comp seemingly having successfully passed a test of the 1680 level, from where its most recent breakout occurred. Furthermore, the Philadelphia Stock Exchange Bank Index has remained relatively strong during the recent market correction.
""The BKX has become the institutional proxy for the market," Bleier said. "As long as it remains strong, I don't expect the market to have any real danger
but if it breaks 850 to the downside, that's when you know the institutions have for some reason begun to sell stock."
Skeptics worry how the recent selling in fixed income will effect third-quarter profits of financial institutions, perhaps partially accounting for the BKX's 3.1% decline for the week ended Monday. On Tuesday, however, the index rebounded 1.2% to 896.10 and is only about 80 points below its
high of 977.26 on Jan. 5, 2001.
Coincidentally, or not, the bounce in the bank index and broader stock proxies occurred in concert with a reprieve from selling in Treasuries. Amid a sense the recent selloff had become technically overdone, the price of the benchmark 10-year note rose 16/32 to 95 27/32, its yield falling to 4.14%.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.