Market Status: Market in confirmed uptrend.
Stocks up in Higher Volume: Aruba Networks – ARUN, Chipotle Mexican Gril – CMG, Medicis – MRX, Netflix – NFLX, Salesforce.com – CRM, Healthspring – HS.
Comments: On Wednesday, the Nasdaq sent a powerful signal as stocks raced ahead broadly. The Nasdaq and S&P 500 rose 3% each. The NYSE composite jumped 3.1% and the Dow 2.5%. The small cap S&P 600 roared 3.8%. Volume eased on the NYSE but rose on the Nasdaq.
Wednesday’s action constituted a follow-through, which indicates a new uptrend is under way. This signal came on Day 4 of an uptrend the Nasdaq began on Friday. Lower NYSE volume prevented a similar signal on the other major indexes, but it takes only one index to flash a valid signal.
With the market in a confirmed uptrend, conditions are much better for buying fundamentally strong stocks breaking out of sound chart patterns.
Economic news on Wednesday hoisted stocks. News out of China and Australia was unexpectedly strong. Later, the Institute for Supply Management’s U.S. manufacturing index for August blew past the Street’s number.
The market will face additional tests on Thursday and Friday. First-time claims for weekly jobless benefits will be reported Thursday. On Friday, the employment report will offer data on payrolls and the jobless rate.
With the market in an uptrend, it’s still best to take nothing for granted.
A sound strategy involves buying stocks in a three-step fashion. First, buy half of your intended position. If the stock rises 2% or so, buy about 30% of the total purchase you intend to make. If the stock rises an additional 2%, you complete the position.
If the stock stalls or falls, you can unwind the position with minimal pain. The advantage to this “pyramiding” method is that you aren’t guessing. The market will guide you.
Remember, the current market outlook is a condition, not a prediction. Whether this is the start of a lasting uptrend or a head fake is impossible to predict. The market itself will answer that question.
Meanwhile, investor sentiment is favoring the market. The latest survey of market advisers showed more bears than bulls, an unusually high level of pessimism. Research shows that advisers are typically out of sync at key junctures.
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