Interesting Test of the Market

Last Tuesday was a heck of a day for both stocks and commodities. Stock markets staged a strong surge that sent various indices back to new multi-year highs. In the commodities area, the May light crude on the NYMEX traded as high as $71.29 a barrel, a new contract high. We also saw a strong upward push by cash gold on the COMEX to an intraday high of $621.05.

 The strong upward move by stocks was impressive given that oil prices are high and could filter into the economy. Investors are encouraged by suggestions from the Federal Reserve that the cycle of higher interest rates may be drawing to a near. This is good for stocks but ignoring the surging oil prices is a mistake.

 Markets saw strong breadth in trading on Tuesday, but there needs to be a positive trend developing. On the NYSE, we saw 3.62 advancing issues for each declining issue on Tuesday, but previous to this, six of the last seven sessions saw breadth on the NYSE below 1.0. The tech-laden NASDAQ is somewhat better with three of the last four sessions with breadth above 1.0. Now as we move forward this week, you want to see more consistent positive breadth develop. This, I believe, is a key for the markets to trend higher.

 On the opposite end, market sentiment also needs to improve. After a strong first quarter of the year, we are seeing some fragility in the new high-new low sentiment readings. On the NYSE, the last seven straight sessions were below the bullish 70% level, representing a warning. The improved reading of 66.02% on Tuesday may signal a renewed optimism. On the NASDAQ, we saw four straight sessions at below 70% but we saw a bullish 81.57% reading on Tuesday.

 The key for this market is whether stocks can continue their impressive run-up staged on Tuesday. The recent ability of stocks to hold, especially the NASDAQ, S&P 500 and Russell 2000, is positive. The strong showing in the small-cap Russell reflects the confidence towards the economy.

 Now sit back and see if stocks continue the buying in face of rising oil prices. It should be an interesting test of the market’s determination to trend higher.