1-21-16 – Where is the market going?

Stocks opened mixed, but are broadly higher into midday Thursday and attempting to build on the dramatic rally Wednesday afternoon. The S&P 500 is up 18.50 points to 1877.83 and an impressive 3.6% above the 52-week lows seen intraday yesterday.

Gains across Europe’s equities markets amid pledges of liquidity from ECB President Draghi set the table for morning strength on Wall Street. An uptick in crude oil is helping as well.

Energy (XLE) is pacing the advance in the equities market. Consumer Discretionary (XLY), Tech (XLK), and Telecomm (IYZ) are seeing relative strength as well. Relative weakness is evident in Utilities (XLU) and Healthcare (XLV).

Treasury bonds are giving back gains on a day of lackluster jobless claims and Philli Fed data. The yield on the benchmark ten-year, which hit intraday lows of 1.94% yesterday, is ticking back above 2%.

Crude oil is seeing strength in the wake of Weekly Inventory Data and was back above $29. However, gold has lost some of its “safety” bid and is down $13 to $1093.

CBOE Volatility Index (.VIX) is off 1.40 to 26.19 and overall trading volumes are well off the frantic pace seen Wednesday. Roughly 3.4 million calls and 2.9 million puts traded through the first two hours. Projected volume for the day, of 16.9 million contracts, is nearly 10 million less than the day before.

Indeed, the action intraday yesterday seemed to hint at panic and a moment of “capitulation”, as put volume reached extremes and VIX made a move beyond 32 for the first time since early-September. Although the trading week is only four days this week due to the holiday Monday, the abrupt turnaround Wednesday hinted at a bullish mid-week reversal, which would set the table for further gains for equities in the days/weeks ahead. Follow through this afternoon and tomorrow would be consistent with a bullish reversal after a period of capitulation.

The focus will also be on fourth quarter earnings and the bar has been set very low. Many names, like Verizon (VZ), Traveler’s (TRV), and even the energy company Kinder Morgan (KMI) today, should find it rather easy to top estimates. If so, the underlying tone will improve through the early rounds of earnings and heading into the 1/27 FOMC meeting. A decline in correlations would lower overall levels of volatility as well. Crude oil remains a wild card.

From a technical point, a midweek reversal has not been confirmed and further strength is needed before the weekend to support a bullish scenario. Until then, we are simply in the midst of a short-term bounce from oversold conditions. The S&P 500 is clearly facing resistance at current levels around 1875, which coincides with Aug and Sep lows. A break of 1895-1900 is likely to be a formidable challenge as well. On the downside, today’s lows around 1850 might offer some support and beyond that, there isn’t much before the panic lows of 1812.29 intraday Wednesday.