Stocks jumped off the charts today as bulls played the Uno Reverse card on Friday’s big selloff. The Dow, S&P, and Nasdaq Composite all soared, helped higher by a wicked short squeeze and better-than-anticipated bank earnings.
Bank of America (NYSE: BAC) blew away trading revenue estimates while net interest income climbed to a 10-year high last quarter thanks to the recent batch of Fed rate hikes.
Should the Fed continue to raise rates, BAC should pull down even gaudier interest revenues in the future. This report has made the bank even more sensitive to rates, however, meaning that when the Fed eventually does capitulate by lower rates again, BAC stands to get hammered lower.
BAC’s earnings followed in the footsteps of JPMorgan (NYSE: JPM) which also reported a beat last Friday opposite a pair of misses from Citi (NYSE: C) and Morgan Stanley (NYSE: MS).
BAC surged over 6% in response.
But bank stocks weren’t the only ones rising today. Nearly every sector saw a lift in share prices thanks to a short squeeze that was “primed” via massive shorting from hedge funds last Friday.
Traders at the Goldman Sachs Prime Desk explained the situation following Friday’s bloodbath session:
“The overall Prime book saw the largest notional net selling in 4 months (-2.1 SDs), driven by short sales outpacing long buys nearly 5 to 1 – this week’s notional short sales ranks in the 94th percentile vs. the past year,” wrote the bank’s analysts in a note to clients.
It was similar to what happened last Thursday after the release of the September Consumer Price Index. Hedge funds loaded up on shorts expecting a hot CPI number. And though the CPI release was initially bearish, short-covering bears fueled an enormous intraday reversal that saw the S&P close significantly higher on the day only to reverse sharply the next day (Friday).
Does a similar fate await bulls this time around?
It certainly seems that way. In the chart above, you can see that the S&P 500 is trading well below the 200-day moving average. Being below the 200-SMA has favored bears, historically.
Bear market rallies ultimately fail most of the time, unless a higher low has been set prior to a bullish setup. That was the case this summer when the S&P set a higher low before closing above the 10-day moving average.
The index also closed above the 10-SMA last Thursday only to reverse lower on Friday. A lower low – not a higher low – was set in the process. That should not inspire confidence among dip-buyers or anyone looking to take the index long above the highs of the last few sessions.
In all likelihood, this rally will fail despite the recent short squeeze.
Conversely, for General Motors (NYSE: GM), a rally may finally be on its way after a multi-week selloff. GM showed bulls in August that it had the ability to break away from the general market. That month was rough for the S&P.
But for GM bulls?
It wasn’t bad at all. GM stretched out its summer rally into mid-September while the S&P was plummeting.
Another disconnect may be in the works. Unlike the S&P, GM has set a higher low relative to the summer low (not pictured) and, today, the stock closed above the 10-SMA.
The stochastic indicator suggests it has plenty of room to run, too. GM also broke its minor bearish trend (yellow trendline) last Thursday.
For those reasons, it might make sense to take a bullish position on GM with a trade trigger of $34.29, above today’s high, as the general market attempts to make another futile attempt to push higher.