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After the Turmoil, Oversold Stocks Are Looking for Gains

Anthony Mirhaydari

Stocks inched higher on Tuesday, recovering from early session losses as new Federal Reserve chairman Jerome Powell finally uttered the words of support the market has been waiting for amid the recent volatility and chaos.

In his ceremonial swearing-in speech, he said policymakers would remain alert to any financial stability risks. That was taken as a green light to buy, helping large-cap stocks move back above their 20-hour moving average for the first time since stocks peaked on Jan. 29.

In the end, the Dow Jones Industrial Average gained 0.2%, the S&P 500 gained 0.3%, the Nasdaq Composite gained 0.5% and the Russell 2000 gained 0.3%. Treasury bonds rebounded slightly, pushing yields on the 10-year down to 2.82%. Crude oil weakened. Gold moved higher, threatening a breakout from its recent pullback. And the dollar moved lower.

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Breadth was positive, with advancers outpacing decliners by a 1.4-to-1 ratio with 21 new highs and 55 new lows.

GNC Holdings Inc (NYSE:GNC) surged 28.6% after reporting results and the announcement of a partnership with China’s Harbin Pharmaceutical. Same-store sales increased 5.7%, including online. But it was the China announcement that drove the upside, with the company poised to move into the Chinese market with GNC-branded products.

Stocks Make Minor Recovery After Recent Turmoil

Under Armour Inc (NYSE:UA, NYSE:UAA) gained 17.4% to hit its best level since late October after reporting better-than-expected sales for the fourth quarter. Amazon.com, Inc. (NASDAQ:AMZN) gained 2% amid dip buying.

Looking ahead, all eyes will be on Wednesday’s Consumer Price Index report, with the catalyst for the recent correction February’s surprisingly strong jobs report showing an upswing in wage inflation. Analysts are looking for the year-over-year CPI to come in at 2%, a slight decrease from the prior month.

I think this is likely, as the wage data in the jobs report was masked by a steep decline in total hours worked.


Conclusion

Dow Jones

On a technical basis, watch for a run to the Dow Jones’ 50-day moving average near the 25,000 level. Jason Goepfert at SentimenTrader notes that last week’s scramble out of stocks and into hedges (like long VIX) points to positive returns going forward. In cases similar to now, stocks rose over the next two months 62 out of 70 times by an average of 3.4%.

Stocks are also oversold on the Relative Strength Indicator basis after just being badly overbought. Similar swings in sentiment in the past have resulted in solid returns: Of the 20 examples since 1928, 90% were positive three months later for an average gain of 4.2%.

Assuming Wednesday’s CPI report is tepid, there is no reason to believe stocks can’t zoom back to prior highs. It’s only when inflation really starts to bite that volatility will reappear.

Check out Serge Berger’s Trade of the Day for Feb. 14.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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Anthony Mirhaydari is the founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.

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