The S&P 500 punched to new highs during the first week of August, and the Nasdaq logged its strongest week since April. A Tuesday follow-through day confirmed the new uptrend, though heavy trading in a handful of penny stocks briefly muddied the volume signal. This week's consumer price index report is the rally's next test.
The S&P 500 punched to new highs last week, and the Nasdaq notched its strongest week since April, as the stock market shifted back into rally mode during the first week of August. Coherent and Palantir each rebounded around 40% to lead the S&P 500 for the week, while Palantir and Shopify topped the Nasdaq 100.
S&P 500 confirms a follow-through day
That rally gained confirmation Tuesday, when the S&P 500 logged a follow-through day, confirming a new uptrend on the fourth day of its rally attempt. The Nasdaq appeared to miss its own follow-through signal, though, because trading volume was lower Tuesday than Monday.
But Monday's volume told a misleading story. A large share of that day's trading came from just four penny stocks.
Penny stocks skew Monday's volume
Megan Holdings, which trades around 10 cents per share, moved more than 985 million shares on the Nasdaq Monday — nearly one-tenth of the exchange's entire trading volume for the session, according to IBD Market Research Director Justin Nielsen. Monday's four top-volume stocks all traded below 50 cents a share and represented as much as 25% of the Nasdaq's entire trading volume for the session.
IBD Market Research Director Justin Nielsen said: "Volume is very problematic when you have these low-priced stocks skewing the volume."
Dollar volume, which multiplies volume by share price, is a better, if more complicated, gauge. By that measure, Nasdaq trading Tuesday exceeded Monday's level, supporting the view that both indexes completed follow-through days that day.
Moving averages add to the case
The Nasdaq also climbed back above its 21-day exponential moving average on Monday and its 50-day line on Tuesday, then held its daily lows above the 21-day average through the final four sessions of the week. The S&P 500's move to a new high marked a breakout above a shallow consolidation that started in early June, and the Nasdaq ended Friday less than 2% off its highs in a similar pattern.
Inflation data is the next test
The consumer price index, due Wednesday, dominates the coming week's economic calendar. Economists don't expect it to raise red flags for the Federal Reserve: the 12-month CPI inflation rate is expected to dip to 3.4% from 3.5% amid lower gas prices, according to FactSet. Core CPI is seen rising 0.2% on the month, with tariff rebates potentially helping to keep down price hikes.
Producer price data, which also feeds into the Fed's preferred inflation gauge, follows Thursday. July retail sales data arrives Friday. The University of Michigan's consumer sentiment index closes out the week.
Source: Investor's Business Daily
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