You can tell the tone of a market by the way it reacts to news. On Monday, U.S. stocks were down substantially on fears of a government shutdown. So when the government shut down, what happened? The market rallied. On Wednesday, the market re-considered its decision to rally on Tuesdsay. Futures were deeply in the red in the pre-open and the SPX was down over 10 points at the open, but rallied to close at the highs of the day. Such strength in the face of negative news has to be viewed bullishly. In addition, the chart below shows that the 50-day moving average has acted as technical support, which the index has not breached.
As confirmation of the bullish outlook, consider the behavior of the higher beta small cap Russell 2000 Index, which has been the leadership in the latest advance. The Russell 2000 has staged multiple upside breakouts in this environment and remains in an uptrend.
This kind of market action is reflective of the short-term supply and demand dynamics of the stock market. The bears just don't have the strength to push stocks lower despite the news backdrop. I can only conclude that the bulls remain in tactical control of the tape. Until fundamentals show signs of deterioration, my inner trader's inclination is to stay long this market.
Disclaimer: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui's blog to ensure it is connected with Mr. Hui's obligation to deal fairly, honestly and in good faith with the blog's readers."
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