Here’s What the Bulls are Buying [3 Must-See Charts]

Less than 48 hours ago, many investors believed chaos was returning to the markets.

Since the beginning of the month, we’ve watched the financial media flip the script, tossing out their bullish narrative for a decidedly more cautious tone.

As stocks drifted lower this week, everyone was convinced the rally was finally running out of steam and ready to post its first significant pullback in months. Volatility was itching to make a comeback! The bears would finally come out of hibernation!

But stocks had other ideas.

The Dow erased its Wednesday losses and pushed higher by almost 190 points. The Nasdaq Composite jumped 1.3% to close at new highs. So much for that pullback…

The bulls have a great chance to get cocky again as the market makes its final push into the holiday season. Meanwhile, the financial press is frantically digging for controversy as stocks snap back to life.

To help you fight through the noise, we’re going to dive below the major averages to discover exactly what the dip buyers are gobbling up as the trading week ends.

Let’s get started…

1. Small-caps snap back

The post-election small-cap rally was intense. As of early December 2016, the small-cap Russell 2000 had jumped 40% above its February lows thanks in part to an incredible 14-day run to cap off November trading. That was the index’s longest winning streak in more than 20 years.

At the time, we noted this kind of action is how big changes in trend happen. One second, everyone hates small-caps. Just when the last seller leaves the building, a furious rally begins to take shape. And the powerful rally that sent the Russell to new highs was potentially the start of an even bigger move.

But small-cap performance was marked by sharp rallies and long, choppy consolidations this year. The small-cap Russell 2000 the early months of 2017 in the red. We were treated to a sharp pullback followed by strong rally beginning in late August, followed by another multi-week pullback.

But small stocks finally caught a bid yesterday. The Russell 2000 jumped more than 1.5% on the day, beating out the red-hot Nasdaq. This bounce could be the start of another leg higher for the sector.

Remember, we like to see small-cap stocks lead the market. Investors buy smaller stocks when they are willing to take more risk. That hasn’t been the case over the past several weeks.

2. Transports start their engines

After last summer’s Brexit bottom, the Dow Jones Transportation Average was one of those down and out groups that started to power higher. Transportation stocks like airlines had been absolute dogs for weeks. But as the market bottomed out, these sickly stocks began to outperform the major averages once again.

At the time, it was important for the lagging transportation stocks make up for lost ground. After all, transports endured an actual bear market as the major average chopped along for the past two years.

But like their small-cap counterparts, the transports lost their mojo earlier this year. The Dow Jones Transportation Average topped out on the first day of March. This false breakout led to a swift move lower. Just a few weeks later and these stocks were dangerously close to correction territory.

The action we witnessed the rest of the year mirrored what we were seeing in small-cap stocks. Transports endured a sharp summer correction followed by a September rally and the October – November pullback…

The transports also posted a monster rally Thursday, launching higher by more than 1.6% on the day. This could be the spark the sector needs to push to new highs before 2018…

3. Biotech finally bounces

Earlier this week, I warned that biotech stocks teetered on the brink of a breakdown.

After sneaking lower to begin the new trading week, the SPDR S&P Biotech ETF (NYSE:XBI) and the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) were each approaching important support levels.

Their recent performance has been less than impressive. The small-cap SPDR S&P Biotech ETF dropped almost 8% below its early October highs. Meanwhile, the iShares Nasdaq Biotechnology ETF fell almost 9% over the same timeframe.

But yesterday’s action could help get these stocks back on their feet. Biotech stocks bounced for the second straight day, jumping another 1.5%.

The move helped launch the large-cap iShares Nasdaq Biotechnology ETF back above its 200-day moving average. If they can grab a little momentum here, these stocks could repair some of the recent damage and rally well into 2018…

Sincerely,

Greg Guenthner
for The Daily Reckoning

The Daily Reckoning