The oversold rally continued today. The December pending home sales data, which showed a slight increase from November, and news that homebuilder (DHI) actually made a profit in its latest quarter injected a positive mood into the market. After opening nearly flat, stocks claimed throughout the day. All three major indexes closed near their intraday highs. The DJIA finished 111.32 points (+1.09%) higher at 10296.85. The S&P 500 rose above 1100, up 14.13 points (+1.30%) to close at 1103.32 while the NASDAQ added 18.86 points (+0.87%) to 2190.06.

Breadth was positive. Advancers led decliners by a 23 to 7 ratio on the NYSE and by a 14 to 11 ratio on the NASDAQ. Volume expanded slightly from yesterday but still relatively light compared to last week. More than 80% of the volume was on the upside on the NYSE while over 70% of the volume was up on the NASDAQ. With help from the declining dollar, crude oil has also enjoyed an oversold bounce in the past two sessions. After hitting a two month low at $72.43 per barrel last Friday, the front month crude settled at $77.23 per barrel today.

  

The S&P 500 is now back in the 1083-1119 range it was stuck in for most of November and the first half of December. Resistance comes in at 1113, its downward sloping 50-day moving average, followed by the 1119-1120 area. While sentiment changed somewhat today, this two day rally still looks like an oversold bounce. The question here is: is this time different from last year? Recall that during last year's pullbacks, which typically started late in a month and lasted into the first several trading days of a new month (mid-June to early July, late August, late September and late October), stocks went straight up for days following the pullbacks and reached new recovery highs soon afterward. While the same scenario could happen again this go around, there are some notable differences in this latest pullback. First, the slope of 50-day moving averages of the major indexes remained up in last year's pullbacks. This time, they all point lower suggesting a change in the intermediate trend. Second, the momentum readings dipped lower this time than those during previous pullbacks. Lastly, the dollar was in a downtrend during the second half of the last year. (Remember all that talk about the inverse relationship between equities and the greenback?) Now, the dollar is in an uptrend. The depreciating dollar allowed the materials and tech sectors to lead the rallies last year. Which sector will take the lead now? Will it be the financials if they can get rid of those proposed regulations? The market hasn't shown us yet.

  

Notable earnings due out on Wednesday include: PFE, TWX, R, RL, YUM, V, CMCSA, BRCM and CSCO. On the economic front, the ADP private jobs report as well as the January ISM Service Index will be released in the morning.

  

by Yin Lin, CFA