Tech stocks soared this afternoon, lifting the general market as bulls attempted to spur on a bear market rally. The Nasdaq Composite enjoyed a major gain (+1.58%) while the S&P rose more modestly (+0.59%). The Dow (+0.15%) only climbed slightly higher on the day.
Netflix (NASDAQ: NFLX) earnings beat estimates this morning after the streaming giant told shareholders that it lost just 970,000 subscribers last quarter vs. 2,000,000 expected. This was a major surprise that launched NFLX shares abruptly higher alongside other streaming stocks like Disney (NYSE: DIS) and Roku (NASDAQ: ROKU).
Tech stocks joined in on the fun as Big Tech shares also jumped following Netflix’s better-than-expected quarter.
Dow stocks didn’t do as well, obviously, but still managed to eke out a minuscule gain. The S&P split the difference.
Now, the Dow and S&P linger in pseudo-breakout territory as a result.
Neither index rose more than 1% above the prior day’s high, which we like to see when a stock or index breaks out past resistance.
Meanwhile, the Nasdaq Composite has fully broken out.
Tuesday’s rally saw over 90% of NYSE stocks achieve a positive return on the day. The market didn’t have as good of a trading session this afternoon, but it did avoid another bearish reversal – something the indexes had a knack for doing over the last few weeks after touching resistance.
“We view this bullish breadth day as a sign that the summer rebound for U.S. equities can continue,” wrote Bank of America technical analyst Stephen Suttmeier.
Other analysts weren’t as optimistic.
“History says, but does not guarantee, that yesterday was more likely a bear market bounce than the start of a new bull market,” Sam Stovall, chief investment strategist at CFRA Research, explained in a note.
Stocks could sustain their rally, however, if earnings continue their current trend. The current earnings season hasn’t been fantastic (or even good), but it also hasn’t been terrible, either. That seems to be enough for bulls who expected the worst after weeks of pre-earnings profit warnings from America’s top stocks.
And so, with cautious optimism, traders may want to consider taking long trades on previously beaten-down names. The market’s recent choppiness shouldn’t be ignored, but if a bear market rally is truly here, sheepish traders might miss out on what could be another week of big gains.
Caterpillar Inc. (NYSE: CAT) certainly matches the description of “beaten-down” after plunging for weeks on end. The stock attempted to break out in early July but ultimately failed.
In the process, however, the stochastic indicator established bullish divergence relative to CAT’s price action. The stochastic indicator set a higher low while CAT set a slightly lower low.
CAT also closed above the 10 and 20-day moving averages over the last two trading sessions. The stock’s bullish trend (yellow trendline) was broken as well.
For those reasons, traders may want to go long on CAT with a trade trigger of $181.49, above today’s high, as the general market attempts to push forward into a more serious bear market rally.
