What's so different today from yesterday? How could we collapse yesterday into the close of the market and today hold on to the gains? How did we rack up a 3.9% S&P gain, the largest since 2011?
First, let's just speak to the entire random nature of what's going on with stocks. We are trading in lockstep with the S&P 500 futures at the open. They rallied hard from the get-go, after falling some 10% for the year.
How is that possible? I think we have some substantive things going on that are positive and some more ethereal, some mechanical and even some that could be regarded as purely emotional that could be drivers here.
First, we always have to turn to China as a primary reason for our stock market's direction, and while the Chinese stock market dropped more than a percent and I continue to think it should be avoided, I think the Chinese decision to boost liquidity -- create more money, basically -- is beginning to be regarded as a real positive. We know the Chinese have been selling some of their vast Treasury holdings of late; they have more than $1 trillion worth, and that money may be put to better use jump-starting a flagging economy rather than propping up stocks that look like they are something out of Nasdaq 2000. Why buy penny stocks when you can buy plants and equipment and get some economic momentum going? The party might be getting its act together after a disastrous experience with plunge protection.
Second, while oil didn't go up -- it's been down for weeks now -- the smartest company in the oil patch, Schlumberger (SLB), the giant oil and gas services company, bought Cameron (CAM), a maker of oil drilling equipment, for $14.8 billion in cash and stock to create a seamless offering for the industry. Why does this matter? Because Schlumberger wouldn't pay a huge 56% premium to Cameron's price if it didn't think that drilling was going away. Schlumberger's got a long-term view of oil and it had the cash to buy back all the stock it wants. It would rather buy something in the industry that would make it competitive to the pending Baker Hughes (BHI)-Halliburton (HAL) merger, which may or may not be approved by the federal government.
Is Schlumberger calling a bottom with oil at $38, down from $91 this time last year? No, but I think Schlumberger is committing this capital and its precious stock because it knows we are much closer to a bottom and it can't afford to wait for another company to snap this one up. It's bullish, not bearish, and I think it put a bid under the energy stocks even if oil went down again.
Third, we got some constructive comments, at least for the stock market, from Bill Dudley, the Federal Reserve president of New York, who acknowledged that international events make the case for a rate hike, and I quote, "less compelling to me than it was a few weeks ago." We live from Fed utterance to Fed utterance and this is the third we have had in four days. It is also the most dovish because Dudley is clearly cognizant of the damage that a rate hike might cause overseas to far more fragile economies and even to our own economy as we know a declining stock market can crimp consumer spending.
We had some leadership in the two largest groups in the stock market, the banks and the techs. Interest rates rose today, typically a bad sign, but if the Fed isn't going to raise short-term rates, then banks are going to make more money off your deposits and that's what's needed to boost their profitability. Higher, longer rates coupled with lower short rates, courtesy of no Fed hike, is nirvana for American banks, and their stocks reacted accordingly. This group's been horrendous of late and it captured a number of upgrades in the morning research.
But tech is the standout. First, despite the withering blast of selling this market has endured, the stocks that comprise the acronym FANG for the most part fared quite well yesterday, with Facebook (FB), Netflix (NFLX) and Amazon (AMZN) all holding on to a tad of their meager gains. Today, Heather Bellini, a fantastic Goldman Sachs analyst, upgraded Google (GOOGL) from Hold to Conviction Buy, talking about a multiyear case for revenue growth and expanding margins. Google has been in a downtrend after a huge move up because of a reorganization into two companies, one a high-growth, high-profit machine, and the other basically a venture capitalist company with hopes of hitting pay dirt sometime in the future. The stock soared 47 points in response to this incredibly timely upgrade. (Amazon is part of TheStreet's Growth Seeker portfolio.)
The Google move, plus the continual recognition of comments from Apple (AAPL) that the company's doing well in China, despite the stock market selloff, enabled a case to be made that tech's not as bad as some would think. (Apple, Facebook and Google are part of TheStreet's Action Alerts PLUS portfolio.)
Finally, we saw a phenomenon at the bell yesterday that we haven't seen in any time since the Great Recession other than the 2011 European collateral damage selloff -- accidental high yielders. That means companies with stocks that have fallen so far so fast that their very safe dividends yield an outside return. Verizon (VZ) clocked in at more than 5% at the bell. Eaton (ETN), GE (GE) and Procter & Gamble (PG) -- all strong balance-sheet companies that can more than handily pay for their dividends or increase them -- all carried yields of about 4%. When 10-year Treasuries are 2%, the opportunity's too great to pass up. Plus, as I always like to say, the worst that happens is the market goes down and you buy more at even better yields. That's good investing even if it isn't anything special when it comes to trading. I like investing in high-quality companies at lower prices than I otherwise deserve.
OK, now to some technicals, which you may think are mumbo-jumbo, but on a given day can control the action. First, as hideous as yesterday's 600-point Dow reversal was, we actually did NOT take out our low from Monday's tsunami of selling. That's right, we didn't violate it, so to speak, and that's actually a very bullish development. Short sellers would be pressing their luck if they didn't bring in at least some of their bets after that development.
Second, the S&P's proprietary oscillator, the one I have followed for 29 years, registered a minus-7.9, when anything south of minus-5 is an extreme reading. There's only been one other time in the last four years that we have had such a negative reading, and that's back in 2011. While it didn't mark a bottom back then, it does show the extreme oversold condition that comes with days and days of declines.
We often like to take stock of sentiment by examining the Investors Intelligence poll that shows the number of bullish and bearish newsletter writers out there. We had only 31% bulls, down from 37% bulls just last week, along with 22% bears and 45% believing we will have a correction. I think it's a little late to turn that bearish. Obviously so do others.
Then there are just some positive timing issues. Although we opened up some 400 Dow Jones points, we shed 300 of them and yet still held. So those who wanted to get in got reasonable prices for waiting. Second, yesterday we peaked right before going into the time when clerks execute margin calls. There were clearly some speculators who had positions closed out. This time we bottomed right before that witching hour, and the forced selling seems to be over for now.
Finally, the market didn't falter in the last half-hour when corporate buybacks must be curtailed, signaling that buyers were ready for whatever last-minute selling might emerge.
So some constructive comments from the Fed, China and tech coupled with some important technical dynamics and a decline that has actually created inexpensive stocks for the first time in ages produced a monster one-day bull market and broke the vise grip of negativity that had choked almost all hope out of this market.