Wednesday was another mixed session for the stock market, even amid optimism surrounding the housing market. The S&P 500 traded indecisively during the first 30 minutes of Wednesday’s session, but then got a kick start around 10 a.m. ET with the release of a stronger-than-expected new home sales report for January. The report showed that new home sales rose 9.6% to a seasonally adjusted annual rate of 468,000 versus the consensus estimate of 400,000, marking the highest level of new home sales (measured as contracts signed, not actual closing like existing home sales) since July of 2008.
The knee-jerk response to the encouraging report pushed the S&P up through the 1,850 level, which provided technical resistance soon after the start of trading. Once again, though, the benchmark index hit some turbulence above that level.
That interference was owed in large part to the continued underperformance of the financial sector, which is acting as an influential drag on the broader market. The rally in bonds that has been effectively lowering yields is pinching the net interest margins that drive banks’ profitability.
Note that the financial sector has gained just 2.0% versus a 3.5% jump for the S&P 500 during the month of February. That laggard showing warrants keeping a close eye on the sector, given the important role that financials play in feeding economic growth and influencing stock market sentiment. Without strong participation from the financials, breakout efforts will be looked at as questionable in terms of their sustainability.
At the moment, the stock market continues to toe a line of optimism that economic and earnings growth prospects are going to ramp up in coming quarters with the backing of pent-up demand and a conscientious Federal Reserve that won’t unnecessarily tighten the screws of monetary policy. As an important aside, Fed Chair Janet Yellen is going to testify before the Senate Banking Committee Thursday morning.
By and large, the stock market sees Yellen as a friend, not a foe, when it comes to the price action that has fueled buy-the-dip efforts in February. Her testimony on Thursday, therefore, could be the convincing near-term breakout point for the stock market, which has had some difficulty finding its way so far in 2014.
The market’s love affair with Ben Bernanke and now Janet Yellen is pretty obvious and is one reason we’re seeing stocks firm up in front of Yellen’s testimony. If she says all the right things, then the technical headwinds that have kept the S&P from closing at a new all-time high will likely pass and invite further upside. By how much is up for question, but the next technical target for the S&P is 1,880.
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