Manufacturing data catches stock market by surprise

FRIDAY'S MARKET WRAP-UP

After a strong start to the week and with the 50-day and 100-day moving averages looming overhead, I went into Wednesday's close with the impress that, while some more upside was still quite possible, the pace of the buying would slow and we'd start to see some profit-taking ahead of Friday's closing bell. So much for that theory! While this is typically the case after a strong three-day run like the indices experienced from Monday through Wednesday, promising global news and strong economic reports stateside have kept even hints of a bearish takeover at bay.

The past two months have been plagued by soft data and continued fears that a true economic recovery is still far on the horizon. Ongoing news from the housing front and employment data has done little to ease these fears. Nevertheless, as the indices tested 200-day moving average zones and the second round of quantitative easing wound down, glimmers of hope began to appear.

I was certainly not in the "jump on the bandwagon" crowd with last week's rally kicked off. I picked up shares in companies that did have slower downside action and the more rounded lows I spoke about throughout the first half of June, but I was prepared to be "unsurprised" should the market make a stronger test of the daily support prior to the end of the month. The market, however, had other plans and never even developed a larger intraday strategy for such a retest of lows to unfold.

When watching the lows develop, the Nasdaq ($COMPX) stood out. Instead of pulling back into the final week of June like the S&P 500 ($SPX) and Dow Jones Ind. Average ($DJI), it hugged its 20-day moving average. This gave it a stronger chance, as I expressed at the time, of being the one to manage the best breakout on the upside should it occur. And, in fact, it outstripped the weekly gains this past week in the both the S&P 500 ($SPX) and Dow Jones Ind. Average ($DJI), rallying 6.2% compared to the "mere" 5.6% and 5.4% gains in the other two, respectively.

Dow Jones Industrial Average (Figure 1)

Holy ISM Batman!

The market was showing continued strength on Friday even before the opening bell rang. Once again the index futures were basing along the highs of the week with no sign of slowing. The lower trend channel served as support (as shown in Figure 3 of the NQ). While it was not surprising to see higher highs develop on Friday, what was a surprise was how quickly those highs were made and how strong the move was. Instead of seeing the pace of the buying slow ahead of the weekend, the indices experienced another surge that took them once again to the upper end of the weekly trading channel.

Next page: More on what caused Friday's rally

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