Climbing a Wall of Worry, Stocks Just Did Something Highly Unusual

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The S&P 500 just did something highly unusual: It had two consecutive “outside days.”

That’s when prices make a lower low and a higher high than the previous session. It’s often considered a reversal pattern, which makes the activity so interesting. It was only the ninth time in the last decade such a pattern occurred in back-to-back sessions, according to TradeStation analytics.

The activity stands out because stocks began the week on a bearish footing. A rally early Monday fizzled and was followed by a quick dive this morning. But then the SPX held its low from the previous Tuesday and surged back to make a new all-time closing high. The conclusion? Sellers tried, but simply couldn’t control the market.

TradeStation data showed other potentially bullish things. The number of index members above their 50-day moving averages jumped from 271 to 300. The reading, which fell under 200 on July 19, is now back to its highest level since mid-June. (See for yourself with custom index $50DMAASP.) The Advance/Decline line also made a new high.

S&P 500, daily chart, highlighting key patterns.

Market Breadth

More stocks above their 50-day moving averages and a rising Advance/Decline line suggest that market breadth is improving. This is potentially important because things looked negative lately as gains narrowed to a smaller set of companies. Now participation to the upside is widening — a potentially bullish change.

One reason for the strength seems to be excessive pessimism. Less than 40 percent of investors were bullish last week, according to the American Association of Individual Investors. (That’s down from over 50 percent April.) Negative survey readings can be contrary indicators because they may show how many people are underinvested. As the old adage says “bull markets climb a wall of worry.”

Next, earnings remain strong. FactSet reported last week that seven out of eight companies have surpassed consensus estimates so far this reporting season. Profits are also up a whopping 85 percent, the strongest gain since 2009. Revenue growth of 23 percent is the highest since at least 2008.

In conclusion, we entered August with potential signs of a pullback and worries about the delta variant of coronavirus. But Tuesday’s price action undid a lot of those negatives. Keep reading Market Insights for more on new leadership groups starting to emerge.

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