Major averages rallied yesterday on mixed volume, higher on the NASDAQ Composite, which has now joined the other averages in closing above its 50-day moving average.
As we wrote in yesterday's MDM report:
The number of powerful bearish arguments and lack of leadership have been at the forefront during this bounce, yet the market is never wrong, and yesterday's strong rally was a sign that the quantitative easing and burgeoning negative interest rate environment could push more capital into hard assets and equities, thus the US stock market being the tallest standing midget would reap the benefits. While it is still too soon to say a slingshot effect has begun, it has been key to remain fluid in these markets, and not get wedded to either a perma-bullish or bearish stance.
On the sentiment side favoring a continuation of this bounce, AAII bulls are at all time lows, falling below the lows of March 2003 and March 2009. That said, the market's move was quite large so some backing and filling could be expected. Thus while the MDM remains on a buy signal, the VIX Volatility Model (VVM) senses short term advantage so is buying volatility in anticipation of a briefly backing and filling market.
Some risk-on groups are playing catch-up on this bounce. With a potential shifting away from defensive names in the markets as we observed in a prior MLR, here are some higher quality pocket pivots that emerged yesterday:
Electronic contract manufacturer FN had a pocket pivot. It gapped higher on its prior earnings report. Earnings and sales are accelerating, group rank 55.
Automotive parts stores ORLY had a pocket pivot breakout. Earnings are solidly consistent, ROE 46.4%, group rank 36.
Airline ALK - Earnings are accelerating, pretax margin 24%, ROE 37.1%, group rank 78.
Semiconductor SIMO - Monday's pocket pivot is still valid. institutional sponsorship has grown over the last 3 quarters, pretax margin 25.5%, ROE 40%, group rank 29.
Server system maker SMCI - Monday's pocket pivot is still valid. Group rank 33.
Keep in mind buying on constructive pullbacks to lower your risk has been a useful strategy in these markets.