Market Extra: Why a stock-market rally has taken hold on Wall Street in February

Stocks are levitating higher on Wall Street, with major benchmarks and a few other market indicators offering signs that a rally that took hold in January may give way to a more lasting uptrend.

The durability of this most recent round of ebullience isn’t 100% clear after stocks got routed back in October. Thus far it has been underpinned by waning concerns about rate hikes by the Federal Reserve, and waxing optimism that a prolonged trade spat between the U.S. and China can be resolved in coming weeks, but here are a few indicators that market technicians are watching to help confirm the current bullish turn for equities:

S&P 500 index

The S&P 500 index surged 1.3% higher on Tuesday, with investors watching for a close above the broad-market benchmark’s 200-day moving average at 2,743.38 to help determine if the index is tilting upbeat on a long-term basis. It closed just above that mark, at 2,744. According to Dow Jones Market Data, that ended its longest stint below the 200-day average — 46 trading sessions — since the 48-day period ending in March 2016. Market technicians use moving averages to help gauge bullish and bearish long-term and short-term momentum in an asset.

Thus far, the 2,743-to-2,744 level has served as resistance, with the index tending to recede as it had closed in on that level in recent days, market technicians said. That makes a break above that potentially significant, with Michael Kramer of Mott Capital Management forecasting a climb toward 2,800.

Meanwhile, the Dow Jones Industrial Average DJIA, +0.54% rose more than 370 points Tuesday, extending its gain above a long-term trend line.

The Nasdaq bear-market exit

A table of how the Nasdaq has performed in past bear markets

The stock-market benchmark, often employed as a proxy for the health of technology and internet-related stocks, on Dec. 21 closed more than 20% below its all-time high set on Aug. 21, meeting the widely accepted definition of a bear market. After continuing its fall to mark a closing low for the selloff of 6,192.92 on Dec. 24, the index has punched higher and now stands about 19.8% above its Christmas Eve nadir.

A finish at or above 7,431.50 for the Nasdaq COMP, +0.41%  would mark a rise of 20% from its recent low and — at least by one widely used definition — an exit from bear-market territory.

According to Dow Jones, the past four exits from a bear market saw a gain over the next six months.

Small-cap surge

The index of small-capitalization stocks, the Russell 2000 index RUT, +0.31% , has been surging since a noted Dec. 24 low, outperforming the three other main stock-market benchmarks, according to Frank Cappelleri, a sales trader and technical analyst at Instinet. The Russell 2000 has gained 21.2% since its Christmas Eve nadir, according to FactSet data.

When small-cap stocks rally along with their larger-cap peers it is generally viewed as a bullish sign for the markets.

The Instinet trader said the Russell 2000’s run-up is creating a bullish inverse head-and shoulders pattern:

Dollar

Dollar gauge snaps a win streak

The U.S. dollar spent Tuesday’s session in negative territory, snapping an eight-day winning streak. A strengthening dollar has been a feature of February action, underpinned by haven bets amid worries about a protracted Beijing-Washington tariff spat. A decline on Tuesday, as talks were set to reach high-level officials, helped to bolster stocks on an intraday basis.

Although a stronger buck is often billed as highlighting the strength of the economy, a too-strong dollar can produce headwinds for companies that do much of their business outside of the U.S., as a stronger greenback can increase the relative cost of goods.

As measured by the ICE U.S. Dollar Index DXY, +0.21% , the dollar lost 0.4% on Tuesday, providing some lift for stocks on the session. However, thus far in 2018, the dollar gauge is up 0.6%, according to FactSet data.

Providing critical information for the U.S. trading day. Subscribe to MarketWatch’s free Need to Know newsletter. Sign up here.

Filed in: Top News Tags: 

You might like:

Nike, ServiceNow and SAP CEOs play a game of musical chairs Nike, ServiceNow and SAP CEOs play a game of musical chairs
Meg Whitman’s new venture is thinking big with a short-form streaming service Meg Whitman’s new venture is thinking big with a short-form streaming service
Earnings Outlook: Prepare for an earnings trifecta with Boeing, Tesla and Microsoft on deck Earnings Outlook: Prepare for an earnings trifecta with Boeing, Tesla and Microsoft on deck
Next Avenue: 4 key factors to consider as you seek the ideal place to retire abroad Next Avenue: 4 key factors to consider as you seek the ideal place to retire abroad
Snap earnings show continued strong user growth, but stock slides in late trading Snap earnings show continued strong user growth, but stock slides in late trading
Earnings Results: Texas Instruments stock drops after weak outlook, drags on chip sector after hours Earnings Results: Texas Instruments stock drops after weak outlook, drags on chip sector after hours
Warren says big banks may use repo-market volatility to get rid of liquidity rules they despise Warren says big banks may use repo-market volatility to get rid of liquidity rules they despise
After Hours: ICO offerings way down, but some still using SEC back door to raise funds After Hours: ICO offerings way down, but some still using SEC back door to raise funds
© 2019 Stock Investors News. All rights reserved. XHTML / CSS Valid.