Better Than Expected

Yesterday was better than expected. We’re not talking about the GDP report. Or jobless claims. We’re speaking about the market’s performance. We were impressed.

This year has taught us to allow for the highly unlikely. The market has had an ugly turn down, many bullish stocks are breaking down. We expect others to follow. We should be in for a correction lasting the rest of the year if not longer. And yet there were the indices bolting higher yesterday on news everyone knew ahead of time. While volume was lighter than the previous day it was above average on both exchanges. After all that selling we were quite surprised to see such eager buying. But there it was.

Is it end of month window dressing for institutions? We won’t know for a while. But count Thursday as Day One in the market’s latest rally attempt. O’Neil tells us we need to see a “follow through” on Day Four or later. Most rally attempts fail before follow through after such an ugly pullback as we have seen and require multiple shakeouts. We won’t anticipate and will continue to expect further declines. But combine yesterday’s performance with the “firsts” we have seen this year and we will be prepared for any resolution.

Could stocks support a renewed rally? Many stocks bounced back in light volume and appear to be prospects for second legs lower. But a surprising number are holding up well so far. How stocks like AAPL, GOOG, AMZN, JOYG and myriad others continue to fare will be crucial.

Most impressive yesterday was the behavior of Brazil’s BoVeSPa. The index, which we had previously discussed as picking up the mantle of leadership in what has been a worldwide stock rally, had pulled back for the first time since its impressive second leg higher that began in July. The index galloped off its 50 MA, a logical area of support, on significant volume. Brazil is a commodity based economy and energy and ore stocks of various stripes led the last leg of the market’s advance in the States. The action of the BoVeSPa could well signal that those stocks have much further to go.

On the bearish side the Shanghai Composite posted its fifth distribution day putting that market’s uptrend in peril. And closer to home the broad Medical sector, one of 33 that IBD lists, has taken over the top spot in IBD’s rankings. Medical stocks often take what could dubiously be called “the lead” during corrections because they are usually thought to be reliable growers in good times or bad (you can’t put off treatment for illness until economic growth returns). Of course most of them don’t lead as much as they go down less than other sectors.

In a year that has been difficult for even seasoned traders to grasp correctly today should be especially interesting. Watch the leaders that have held up. They will be your best clue to the immediate direction of the market.