OFFER OF WASHINGTON COMPROMISE SENDS STOCKS SURGING -- SHARP PULLBACK IN VIX ACCOMPANIES STOCK GAINS -- DOW BOUNCES OFF 200-DAY AVERAGE WHILE OTHER STOCK INDEXES REGAIN 50-DAY LINES -- SMALL CAPS ARE STILL MARKET LEADERS
OFFER TO EXTEND U.S. DEBT LIMIT... A Republican offer to extend the debt limit deadline for several weeks appears to include the compromise financial markets were hoping for. Stocks surged all over the world, especially economically-sensitive groups tied to economic growth. While all sectors are jumping today, the biggest gainers are financial, industrial, and consumer discretionary stocks. Small caps and the technology-dominated Nasdaq market are also showing larger gains. Although gold is weaker, most commodities are rising with the biggest gainers coming from energy. Bond yields are slightly higher. The CBOE Volatility (VIX) Index which jumped earlier in the week is falling sharply. Chart 1 shows the VIX Index tumbling today from a failed test of its June high near 22. Since the start of the year, the inability of the VIX to close decisively above the 20 level has helped keep stock market pullbacks relatively small. That is still the case.
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Chart 1
DOW INDUSTRIALS BOUNCE OFF 200-DAY AVERAGE... Earlier in the week, a number of U.S. stock indexes slipped below their 50-day averages, especially the S&P 500. They've regained those support lines today. The most critical chart test has taken place in the Dow Industrials. Chart 2 shows the Dow bouncing off initial chart support at its late August intra-day low (14760) and its 200-day average (red line). That's a very important test. Fortunately, today's sharp rally has kept the Dow above those two important support levels. Also encouraging is the ability of the Dow Transports to regain its 50-day line (Chart 3). A Dow close below its August low would negate the Dow Theory buy signal given over the summer when the two Dow indexes hit new highs.
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Chart 2
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Chart 3
SMALLER STOCKS ARE STILL THE STRONGEST ... Chart 4 shows the S&P 500 Large Cap Index ($SPX) regaining its 50-day moving average today. The SPX also remains above intra-day chart at its late August low (1627). Large caps have actually been market laggards this year. Chart 5 shows the S&P 400 Mid Cap Index ($MID) trading much closer to its summer high. A relative strength ratio of the MID divided by the SPX (top of Chart 5) shows the stronger performance by midcaps. The smallest stocks have done even better. Chart 6 shows the S&P 600 Small Cap Index ($SML) still trading above its August high. The SML/SPX ratio (top of chart) has been rising all year. Upside leadership by smaller stocks is usually a positive sign for the market. Only time will tell if today's political developments lead to a more lasting budget agreement between the two political parties. The ability of the market to build on today's impressive gain may depend on it.
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Chart 4
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Chart 5
