The Bull's Strength

Markets opened this morning with a slight loss but progressed steadily to continue the bullish breakout that has taken the market by storm this week. Later in the day, the Fed released their minutes pertaining to their decision to delay raising rates. Investors responded to the citations of global economic risk and the need for loose monetary policy. The inflation target remains far away even though commodity futures continue to increase. The Dow Jones Industrial Average surged to a 0.82% increase after an initial -0.25% loss during morning trading. With those gains, the market index passes the 17,000 level after a correction in Augst dropped the value below 16,000. The moves have been robust, but a lot of analysts seem worried that the extra girth will not be maintained. The S&P 500 grew 0.88% as well as bulls won today. Just like the Dow, the Fed's minutes pushed the large cap index above the 2,000 threshold just 100 points from the year high. The Global Dow, as well as Europe's Stoxx 600, grew marginally on the continuation of a global bull trend. No sectors in the red today with energy leading the way once again. The gains were certainly systemic as 2,376 advancing stocks fueled their respective sectors. The Russell 2000 also grew 0.92% as small-cap stocks rallied with the Fed's minutes out in the open. Perhaps the biggest surprise comes from the commodity market where WTI and Brent crude oil shot up today with gains measured at 3.89% and 3.34% respectively. The U.S. benchmark remains dangerously close to the $50 level where dramatic shifts in the market could affect institutional and investor psychology. Oil and gas companies gained as XOI jumps 2.56%, and the energy sector rode their coattails with a 1.89% boost in the S&P Energy index. ETF's following oil rose dramatically as well as investors were able to take advantage of bets in favor of the bullish run.

How can we accurately assess the strength behind the gains that has got investors perplexed on which way to move? Long-term growth looks especially feasible as Fed rate hikes look to be delayed for the near future. For this reason, higher debt ratios don't appear as lethal as some would comment. On the other hand, short-term economic weakness has investors worried about global demand and how that will effect inflation and, in turn, payrolls. Currently, the pool of money is circulating slow and appears to be shrinking as emerging-markets are buckling down with the possibility of a recession.

Looking again at the Dow Jones Transportation Averager over the Dow Jones Industrial Average in a ratio analysis, one can see a general market strength indicator. Typically during bullish periods, the transportation sector performs better that the industrials. This chart shows a slight, sudden jump by the transportation index which is highlighted by the blue arrows. This follows an underperformance that marked a bearish movement in the overall market. Here, the chart shows a jump in money flowing into the transportation sector which has been lagging so far this year. The green line shows a trendline with two confirmation bounces that has a very slight positive slope. One of the most important things supporting this rebound is the Chaikin Money Flow indicator and the volume levels. The ratio analysis is supported by volume that is growing with the trend. Systematically, one should see boosts in volume across the board if bullish movements are to continue. We have looked at a general market indicator of bullishness versus bearishness, but perhaps an analysis of the volume behind these bull moves can tell us more about the strength behind the positive movements.

from WSJ

In the image above, there are three tickers charted over the past three weeks with measurements of their volume data associated with the directional movement of price. On the top, the S&P 500's average volume for the bearish movement before the bullish was almost 100 million greater. Although this was due to an outlier which causes that average total to surpass that of the bullish movement, it seems necessary to acknowledge that day. In the end, bullish days have higher volume with the exception of the major sell-off day midway through the bearish week, Volume levels rose about 8.1% consistently as the fourth quarter introduced bulls to the markets. Below that chart, two images display similar data for two big oil and gas integrated services which have come to represent that industry (and sometimes the energy sector as a whole) in the Dow Jones Industrial Average. Looking at the bearish movements on either end, one can observe a stunted lost that was supported by one day of large volume on Sept 20th then tapered off into consolidation. Reversal days weren't necessarily high volume days, but they were not ill-supported either. Both CVX and XOM recorded an average bullish volume almost 2.5 million higher than their bearish trend. Trading behind XOM gains increased 15.3%  and 23.0% for CVX over the past week. With comparison to the market average of volume, oil and gas's surges seem more robust than those in other sectors. As crude futures have been exploding upward, investors have elected the energy sector as the best performing in almost every bullish trading session. With substantial boosts in the crowds behind oil and gas stocks like XOM and CVX, I see no reason to doubt that this trend will survive. Traders are still establishing long positions as estimates of price objectives continue to get more optimistic, and those holding shares are not going to sell yet. On top of that, last quarter's performance, as well as dubious analysts, act as a contrarian indicator for uptrends. Viewing the energy sector from the perspective of the overall market, one can assume that higher oil prices (possibilities of the 50's) will free up the frozen bullish sentiment that was hiding amongst the bears. OPEC and the IEA have predicted a slowdown in energy investments with supply data supporting their outlooks. Investors beware: this may be the quarter that the energy sector takes you by surprise. This breakout should be taken seriously.

As I finish my 50th post and as you finish reading it, I would like to thank you for all the support from my audience. It has been so helpful receiving the positive words that are offered to me. This blog is not an obligation; instead, it has become a truly pleasant process. Thank you once again for reading, and I hope that my content will continue to improve as I become more educated in my research.


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