Turnaround Monday?

The news wires were alive with encouraging commentary today. Headlines such as "Strategists Say Drop In U.S. Stocks Is Chance To Buy" and "Bulls Load Up On Stocks In Worst Rout Since 2002" and "U.S. Stocks Rebound On Upgrades" carried a none-too-subtle message: close your eyes and buy! Whether this was good advice remains to be seen. Nonetheless, enough people followed it to create a small bounce in the index benchmarks.

The S&P 500 came within six points of its 200-day moving average, the penetration of which would signal the end of a long-term uptrend that began almost a year ago. The Russell 2000 Small-Cap Index fell right through the same indicator last week and is struggling to find support. This is consistent with the flight-to-quality attitude that has prevailed lately; to the extent traders must be long in equities, they prefer to be in blue-chips rather than less-liquid small companies. A sustained recovery in the Russell 2000, when and if it happens, will be evidence that the bulls are back in charge.

Among sectors, the worst-hit from last week led the way higher today: basic materials, real estate, energy and financials all had above-market returns to start the new week. Energy services managed a small gain today and is very close to breaking out of the short-term downtrend that began last Tuesday. The automotive sector is still struggling but attracted some bids today. General Motors (GM) reports quarterly earnings tomorrow and is expected to show higher profits.