A confluence of positive influences -- lower oil prices, a weakening dollar and the rampant investor angst that tends to crest at market bottoms -- sparked a sharp stock rally on Tuesday.
So although uncertainty -- and negativity -- have hardly been vanquished, Tuesday's session offered hope for those searching for a tradeable bottom.
A key question is whether Tuesday's advance constituted a technical "confirmation" of the market's
rebound on May 12. Confirmation sessions are characterized by an advance of at least 1.7% for at least one major stock proxy, in conjunction with volume higher than the previous session and higher than average.
each up 1.6% and the
rising 2.2%, the session qualified from that perspective. At 1.55 billion shares,
volume was well above Monday's 1.23 billion shares and slightly above the 1.53 billion year-to-date volume, through April. At 1.8 billion, Nasdaq volume was similarly well above the prior day (1.42 billion) but
its year-to-date daily average of 1.94 billion.
Another complication for the bulls is that Tuesday's session comes nine trading days after the May 12 bounce. Ideally, follow-through confirmation should come four to seven trading days after the initial rally attempt.
"A rally can be confirmed after day seven and sometimes as long as 10 to 12 days after the initial rally attempt," observed GNI Capital principal and
contributor Charles Norton. "But follow-through confirmations after day seven have an increased likelihood of failing."
Norton cited the work of William O'Neil, president of William O'Neil & Co. and chairman of
Investor's Business Daily
, who is most closely associated with confirmation theory among current market participants.
O'Neil wasn't available for comment Tuesday, but the
Web site recently offered this observation:
"Ideally, a follow-through rally confirmation occurs on a day when the index's volume is both higher than the previous session and higher than its average over the past 50 days. If volume turns out to be higher than the prior session, but lower than the average, you probably want to get back into the market more cautiously. The key is to view follow-throughs ... within the context of the technical and fundamental characteristics of the broader market and leading stocks."
The context of Tuesday's advance is, of course, subject to interpretation. From the bulls' perspective, the market's been very frustrating of late, although the S&P 500's ability to bounce along its 200-day moving average has been encouraging.
In terms of leading stocks, Doug Kass of Seabreeze Partners recently made a salient observation
here: "The time to be bearish was months ago, before interest rates rose and inflation resurfaced, when
traded at $90, not $64;
traded at $53, not $45;
traded at $58, not $44; and
at $29, not $21." (Notably, each of those names is up from Kass' original posting.)
On the other hand, bears contend traders' rising frustration suggests rampant bullishness. Indeed, the Nasdaq is the only major proxy to have (just barely) fallen more than 10% from its first-quarter closing high following huge gains in the preceding months. Of course, there are concerns about higher oil prices, Iraq, rising rates and inflation, the presidential election, real estate prices and slowing consumer spending -- not necessarily in that order.
While significant questions remain for the intermediate and long term, there are increasing signs,
evident last Friday as well as Tuesday, that these advances will prove to be more than just one-day wonders.
Buttressing that view, Jim Rohrbach, editor of
, and one of
top-10 market timers for the year ended March 31, adopted a buy signal on the NYSE after the close Tuesday, reversing a sell signal from April 14. (Rohrbach's April 20 sell signal on the Nasdaq remains intact, but he noted it "came very close" to a buy signal on Tuesday.)
Who's Afraid of the Fed?
Among the factors noted last week, gold's continued rally lends itself to a more optimistic outlook. On Tuesday, Comex gold futures rose as high as $390 per ounce intraday and are now up 4.6% since hitting a seven-month low of $371.30 on May 10. Gold's advance came in conjunction with the dollar's weakness; the euro rallied to a two-week high of $1.2125 intraday against the greenback, which slipped to 111.80 yen vs. 112.75 yen late Monday.
To reiterate: There's still a sense among many market participants that what's good for gold is bad for overall equities and vice versa. But in this "reflation" environment, that's no longer true.
Given gold's recent reversal, the dollar's slippage (which aids the profitability of U.S. multinationals), renewed strength in Internet stocks such as
, as well as buying interest in bedraggled tech names such as
, the market is starting to feel a bit like it did six to nine months ago. That is, before participants became obsessed about
Given the recent economic data, including Tuesday's weaker-than-expected consumer confidence report -- as well as geopolitical uncertainty -- perhaps market participants overzealously priced in near-term Fed tightening.
"What is different about the current cycle is the fragility of the recovery -- the growth of consumer spending appears very dependent on extraordinarily low interest rates," observed Thomas McManus, equity portfolio strategist at Banc of America Securities. "We are not getting more defensive now because we believe the Fed cannot run the risk of a significant slowdown or recession in 2005. Meanwhile, the low level of
official inflation means they can tolerate a significant further increase in inflationary expectations over the next several quarters."
McManus maintains a fairly conservative recommended allocation of 65% stocks, 10% fixed-income and 25% cash, and remains most bullish on "inflation beneficiaries" such as energy and basic materials stocks, including
If consensus comes around to McManus' more benign view of the Fed, Tuesday's rally will very likely continue and, almost certainly, many traders will grasp for more aggressive/speculative names.
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