The market giveth and the market taketh away, sometimes accomplishing both in the same trading day and most often when traders least expect it.
On Monday, many market participants were caught off guard (and short) when the market rallied sharply. The same fate befell traders on Tuesday, but in the opposite direction, as major averages stumbled from their midday heights rather than accelerating higher. But those betting the midday swoon would lead to more selling also got a comeuppance, as shares rallied in the final hour.
After trading as high as 8559.77 shortly after 10 a.m. EDT, the
Dow Jones Industrial Average
struggled thereafter, trading as low as 8442.34 before rallying again the final hour to close up 0.4% to 8502.99. Following similar patterns, the
finished up 0.3% to 917.84 vs. its intraday high of 924.24 and low of 911.10, while the
gained 0.6% to 1471.30 vs. its apex of 1482.50 and nadir of 1459.50.
At session highs, all three major indices eclipsed the highs established on April 23, and -- more importantly perhaps -- the Dow was above its March 21 high of 8522. Had the Dow sustained a rally above 8522, it would have "confirmed" the Dow Jones Transportation Average's recent surpassing of its March highs, triggering a bullish signal for Dow Theory purists. That signal failed to materialize Tuesday, and "the longer it takes for the Dow
Industrials to confirm the 'upside,' the more negative the situation," according to Jeffrey Saut, chief equity strategist at Raymond James.
Meanwhile, the S&P failed to sustain a move beyond its April 23 high of 919.70, although the Comp did close above its April 23 high of 1468.08.
Those looking for a bullish interpretation of the session might note the Comp has been the best performer since the October lows. The Comp has posted the best returns and was the first to eclipse its 50- and 200-day moving averages, which it remains above (as are the Dow and S&P). Tuesday's action could be described as a further extension of this trend of Nasdaq leadership and Dow tardiness.
Whether the Dow and S&P now follow the Comp above their respective April 23 highs remains to be seen. But Saut, for one, is "inclined to remain somewhat constructive on stocks provided Dow 8100 is not violated," citing the averages being above their aforementioned 50- and 200-day moving averages.
Confidence Rises, Confidence Fades
The intraday volatility hinted at both classic "buy the rumor, sell the news"-type trading as well as more evidence of the underlying bullish tone, as the market's midmorning and afternoon dips were deemed opportunities to buy shares instead of reasons to sell.
Anyone buying shares recently in anticipation of better economic news got a ready-made excuse to book some profits when the Consumer Confidence Index came out. The Conference Board reported consumer confidence jumped to 81 in April vs. a downwardly revised 61.4 in March and consensus expectations for a much-tamer rise to 69.8. Both the expectations and current conditions indices rose sharply and April's headline number posted the largest one-month increase since March 1991.
Major averages hit their intraday highs shortly after the report came out, then sold off in rapid fashion. Some technically inclined traders waiting for a "breakout" above the April 23 highs may have used the postconfidence spike as an excuse to sell.
Meanwhile, all allusions to 1991 encourage those who'd compare the current environment to that era, "another time when a war had ended, oil prices tumbled and equity prices rallied," recalled David Rosenberg, chief North American economist at Merrill Lynch. (Crude futures fell fractionally Tuesday to $25.36 per ounce.)
"While many economists will undoubtedly gush over today's headline number
there are some sobering aspects of the confidence report," Rosenberg wrote, including:
Consumer confidence peaked in March 1991 and by year-end was actually below pre-Desert Storm levels.
Current confidence is back only to levels seen last December and remains below levels during any period in 2001, including immediately after the 9/11 attacks.
The "jobs are plentiful" index rose to 13% from 11.4% in March, but remains below January levels. Similarly, the "jobs hard to get" index slid to 29.5 from 32.3 but remains above January levels.
While confidence rose, spending plans fell: Plans to purchase an auto fell to 5.9% from 6.6%, the lowest level in nearly seven years, while vacation plans also hit a seven-year low. Plans to buy homes and appliances barely changed.
"If this confidence number is to be taken at face value, then why is it that auto sales so far appear to be below plan in April (despite record incentives) and why are chain store sales coming in below-target for the month as well," the economist asked, rhetorically.
Somewhat lost in the excitement over the consumer confidence index (Rosenberg's sobriety aside) was an unexpected rise in the Employment Cost Index. The ECI rose 1.3% in the first quarter, the largest sequential gain in 13 years and vs. consensus expectations for an advance of 0.7%.
Perhaps concerned about the inflationary implications of the ECI, as well as the confidence data, the price of the benchmark 10-year Treasury fell 6/32 to 99 17/32, its yield rising 3.93%. The dollar rallied early in tandem with shares but faded as the day progressed, ending slightly lower vs. the euro and yen.
Things That Make You Go Hmmm (Reprise)
Monday, I referred to the recent spike in bullishness in the American Association of Individual Investors' survey. As of April 24, bullishness had risen to 63% from 46.3% the prior week.
I hinted that such a leap in retail bullishness could be a sign of a pending market retreat. Supporting evidence arrived Tuesday, courtesy of Rainsford Yang of Astrikos.com, a Web site dedicated to market timing.
Since 1991, the AAII bullishness has risen above 55% in the same week in which the S&P 500 rallied 21 times; that's prior to last week, when it also turned the trick. In 19 of those previous 21 occasions, the S&P reversed course and posted a lower weekly close within two weeks, Yang reported. "While small investors can keep the market on an upward course for a week or so, they don't have the kind of firepower that typically leads to lasting rallies."
And often, those small investors get excited at just the wrong time.
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.