foxex: Markets Gap Higher on Broad Rally

Thursday, August 29, 2019

Markets Gap Higher on Broad Rally

Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Thursday, August 29, 2019

1. Markets Gap Higher in a Broad Rally Fueled by Low Volume

2. Small Cap Index Shows Impressive One-Day Strength

3. Dollar General Surprise Shows Yet More Retail Strength

Market Moves

Stock prices jumped higher before the opening of U.S. markets sparked by comments from China's commerce ministry. The rally proved to be broad based as over 300 of the S&P 500 stocks gapped higher for the day, and about half of them opening more than one percent higher than they closed on the previous day. Unsurprisingly nine of the 30 stocks in the Dow Jones Industrial did the same thing. Further, that same number of stocks closed higher for the day.

What is surprising, however, is that such a broad market rally was not accompanied by a high volume of trading. Stocks and indexes accomplished this feat on slightly less than average volume. While this may be a function of declining volatility in the markets, historical studies show that, statistically speaking, there is less follow-through on days where markets gap up on lower volume.

Unlike recent days, this market rally was led by small cap and technology stocks. During most of August these stocks lagged the rest of the market on a day-to-day basis.

Small Cap Index Shows Impressive One-Day Strength

When indexes, or individual stocks, rise on low volume, the resulting upward trend (if any) is often not sustained for very long. The conventional wisdom goes that there weren't enough investors enthused about the news—whatever it was—that sparked the move. However, today's action may prove to be an exception to that rule and there are at least two points of evidence to support that notion.

The first point of evidence is that small cap and technology stocks closed the day higher than large cap stocks. While that may not seem like a meaningful data point considering just one day's activity, consider that this is the first time this month that the Russell 2000 (tracked by IWM) and the Nasdaq 100 (tracked by QQQ) both outperformed the S&P 500 on a day with a bullish signal.

The second point of evidence is that August volume was abnormally high during the past month so it may make today's volume look unusually small. Compared to the previous month, however, the volume amount looks about average or maybe slightly higher. Could it be that markets are returning to a normal pattern of trading in the near future?

Burlington Stores Breaks Out After a Strong Q2

Big Money Selling Is Increasing

Dollar General Surprise Shows Yet More Retail Strength

Several indications of select retail strength have shown up in the markets over the recent two weeks. Notably companies such as Williams-Sonoma (WSM), Home Depot (HD), Lowe's (LOW), Target (TGT), Starbucks (SBUX) and several others are all showing a strong upward move. Investors can now add Dollar General (DG) to that list as well.

The company reported a surprisingly strong revenues and profits, as well as offering an optimistic forecast for the company's future. This shouldn't come as too much of a surprise since Dollar General acts as the de facto Walmart in towns across America with less than 10,000 people more than 30 minutes from the nearest big box retailer. These people, helped by the current administration's policies, have a little more money to spend that analysts may have realized.

The Bottom Line

U.S. stock indexes jumped higher today showing a gap pattern across a broad swath of stocks. Small caps participated strongly in the action showing risky trades may be back in favor. Retail stocks continue to surge with Dollar General the latest one to report surprisingly good earnings.

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