U.S. stock market makes U-Turn on Tuesday after previous day sell off.
The stock market rallied broadly on Tuesday as the Dow Jones Industrial Average (NYSEARCA:DIA) gained 0.71%, the S&P 500 (NYSEARCA:SPY) climbed 1.04%, the Nasdaq 100 (NYSEARCA:QQQ) jumped 1.45%, and the Russell 2000 (NYSEARCA:IWM) added 0.99%.
The stock market rally was impressive, however, the Dow Jones Industrial Average (NYSEARCA:DIA) was unable to close above the psychologically and technically important 14,000 level.
In other major markets, gold (NYSEARCA:GLD) declined 0.07% to $1674.40/oz and oil gained 0.52% to $96.65/bbl.
Dell Computer (Nasdaq:DELL) made big news with its deal to go private for $24.4 billion, but things weren’t so positive for Yum! (NYSE:YUM) fell 2.9% on a worsening profit outlook.
Momentum is slowing across the stock market’s major indexes and the entire stock market remains in an overbought state and so subject to a correction or consolidation period. The all time highs in the Dow Jones Industrial Average (NYSEARCA:DIA) and S&P 500 (NYSEARCA:SPY) represent significant resistance levels dating back to 2000, and so until the stock market indexes rise convincingly above these levels, it’s too early to say that we’re at the beginning of another leg higher. In fact, if this latest advance fails at current levels, it will create a monstrous triple top formation.
chart courtesy StockCharts.com
The reversal yesterday was largely based on political problems in Spain and rising Spanish bond yields, and so while Europe has been on the back burner for the past couple of months, the crisis there may not be over yet. Read “All’s Well In Europe, Right?”
Retail investors are flooding the stock market with record levels of cash, investor sentiment is at higher levels than normal, and typically this kind of environment is more indicative of stock market tops than stock market bottoms.
The American Association of Individual Investors reports that bullish investor sentiment is 48% versus the average of 39% and other studies show that two out of three investors expect the stock market rally to continue.Investors are putting their money where their mouths are as mutual fund inflow in January appears to be the highest of any month since 2006 and for the first time since the onset of the financial crisis, more money is flowing into stocks than into bonds.
In economic reports today, the Institute for Supply Management’s Non Manufacturing Index fell to 55.2%, down from January’s 55.7% but still in expansion territory. Read “ISM Non Manufacturing Index Signals Expansion”
Tomorrow’s stock market news will include no economic reports but investors will be watching a slew of earnings reports including Du Pont, Time Warner and News Corp.
Bottom line: The stock market and major indexes remain at a pivotal turning point, stuck just below major resistance levels and in overbought territory with declining momentum.