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How Far Can This Rally Go?

by Sam Collins 10/06/09

Strong buying in the financial sector, along with a weak U.S. dollar and the anticipation of better-than-expected Q3 earnings, sent stocks soaring. After four days of gloom, brokers' screens lit up with green instead of red as blue chips and, therefore, the quality-laden Dow Jones Industrial Average (DJI) gained 1.18% and the S&P 500 (SPX) rose 1.49%.

Goldman Sachs's (GS) bank analysts started the day on a positive note by upgrading the large-cap banking sector, and the broad financial sector gained 3.3%. Wells Fargo (WFC) and Capital One Financial (COF) gained more than 6% each.

Alcoa (AA), which is traditionally the first to report quarterly earnings, rose 4.7% ahead of its Q3 report, which will be delivered Wednesday. It was helped by a strong commodities rally in the face of another day of weakness for the dollar. The CRB Commodity Index rose 1.3% with gold up 1.3% and crude oil up 0.7%.

The ISM reported that the non-manufacturing index, which measures the health of the service sector, rose from 48.4 in August to 50.9 in September. Anything above 50 is considered positive.

At the close, the Dow had gained 112 points to 9,600, the S&P 500 rose 15 points to 1,040, and the Nasdaq (NASD) was up 20 points to 2,068.

Volume on the NYSE contracted to 1.1 billion shares with advancers ahead of decliners by 5-to-1. The Nasdaq traded 669 million shares with gainers there ahead by 19-to-7.

November crude oil was up 46 cents to $70.41 a barrel, and the Energy Select Sector SPDR (XLE) rose to $53.12, up $1.15.

December gold rose $13.50 to settle at $1,017.80 an ounce. The PHLX Gold/Silver Index (XAU) closed at $162.33, up $5.16.

What the Markets Are Saying

Yesterday's dollar down/commodities up inspired rally with the financials leading is a pattern that will likely recur many times before the bull is retired. The financial stocks started the rally on yesterday's opening just as the S&P 500 had flicked off of the support line of its bull channel and the 50-day moving average.

Yesterday, I noted the likelihood of this happening as the Relative Strength Index (RSI) told us that the market was due for a rally.

But how far can it go?

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