On Friday, positive economic data, both in the United States and abroad, drove stocks higher. The Dow Jones Industrial Average finally smashed the psychologically significant 14,000 barrier for the first time since 2007, and the S&P 500 posted its second biggest gain of the year.
The Institute for Supply Management’s January manufacturing Purchasing Managers Index (PMI) rose more than expected. The University of Michigan consumer sentiment index for January and construction spending also increased. The only negative report was the increase in unemployment to 7.9%, despite the addition of 157,000 jobs — analysts had predicted an increase of 180,000.
At Friday’s close, the Dow was up 149 points to 14,010, the S&P 500 rose 15 points to 1,513, and the Nasdaq jumped 37 points to 3,179. The NYSE traded 756 million shares and the Nasdaq crossed 485 million. On the Big Board, advancers exceeded decliners by 1.7-to-1, and on the Nasdaq, advancers were ahead by 2.6-to-1.
For the week, the Dow gained 0.8%, the S&P 500 gained 0.7%, and the Nasdaq rose 0.9%.
February started with a rotation back into the lower-quality stocks as demonstrated by the strong surge from the Nasdaq. Last week, I opined that while the better-quality indices were charging ahead, the Nasdaq had slowed to a mere crawl.
Friday’s 37-point romp has invigorated the index, taking it past the September high at 3,171. Now, last year’s high at 3,197 is a mere 18 points, or half of Friday’s advance away from driving the Nasdaq to a breakout.
At the end of January, it appeared that investors were becoming concerned over the high level of the advance, as illustrated by a pop in the CBOE Volatility Index (VIX) during the last week of the month. That concern all but vanished on Friday, as the index not only fell but gapped back down to under 13. If traders are concerned about the high prices, it isn’t being shown on this chart.
Some readers took issue with my Jan. 29 statement that, “The money from bond sales is going into the stock market.” Yet here is more proof that bonds are being sold in such quantities as to overwhelm the Fed’s intent to keep interest rates low.
QE4 started in early December, and yet interest rates have risen to over 3.2%. So even as the Fed continues to buy bonds, the forces of the marketplace appear to be overcoming their overt manipulation of the markets.
Floor traders point to 3.22% as a major resistance point. Watch that number this week, and if rates on the long bond close above it, bonds could be in for a rough February since bond prices fall when rates increase.
Conclusion: The Fed’s ability to control rates is coming under scrutiny, as investors are selling bonds and bond funds at a huge clip and either shortening their maturities or putting money into stocks. At under 13 times earnings, blue chips also pay dividends that could provide a total return of 6% to 10% this year. It is that possible total return that is flushing money out of the bond market.
The next test for the S&P 500 is the high at 1,552 (see Friday’s S&P chart) made on March 2000, followed by the October 2007 high at 1,576.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.