The market roared back to life Monday, building on Friday's reversal and posting its biggest gain in more than two months on hopes of a US budget deal. The S&P gained 2.0% to reclaim its 200-day moving average, and the Nasdaq jumped 2.2%. Politicians on both sides of the aisle are striking a more conciliatory tone in fiscal cliff negotiations, and stocks don't seem to be too concerned about the escalating conflict in the Middle East.
Friday we got a classic outside bullish (or Red Dog) reversal, a pattern that often leads to a short-term bottom in the market. The bounce began on Friday when lawmakers appeared more ready to compromise than expected. The Red Dog reversal strategy from Friday is a great set-up for short-term cash flow, but it can also become a major long-term inflection point. After today's gap and go to the upside, it definitely appears Friday could be the bottom before we rally back into previous breakdown levels. We saw a similar type of reversal on October 4, 2011 serve as a launching pad for the market over the subsequent year.
With the strong close above 1381 in the S&P, the door is now open for a move up to 1403-1407. We will measure complexion along the way, but the action over the last day and a half has certainly been very compelling for the bulls.
It's no coincidence that Apple (AAPL) led the charge higher today. The market has been suffering a crisis of leadership, and today's move in AAPL should help alleviate that concern. The stock had sold off extremely hard over the past two months after topping out above $700, but Friday put in a bullish reversal. The stock opened higher this morning and never looked back, making its strongest pushes just after the open and just before the close. AAPL finished the day up an impressive 7.2%. The strong close opens the door for a move to $574.50 before Thanksgiving.
Due to their sensitivity to the fiscal cliff situation, the banks also showed relative strength today, which we track with the Financial Sector SPDR ETF (XLF). Bank of America (BAC) was the strongest among the big banks, surging 4.1% after Stifel Nicolaus upgraded it to a buy with a $11 price target.
After today's potent move higher, it would be healthy to see some quiet digestion the next few sessions and commitment to higher prices. Staying above 1370-1375 would be constructive.
*DISCLOSURES: Scott Redler is long SPY, AAPL, BAC