Stocks continued their recovery, closing higher for the fifth consecutive week. The rally in stocks was due in large part to the unexpectedly easy tone from the Federal Reserve regarding interest rate hikes.
Most economists thought February’s 4.9% unemployment rate and 2.3% increase in core CPI were grounds for an increase in the fed funds rate. But the central bank decided against raising rates this month, causing bonds to rally. The yield on the 10-year Treasury note posted its first weekly decline in five weeks, falling 10 basis points to 1.88%.
While the S&P 500 and Dow Jones Industrial Average are in the back for the year, some international markets have not fared as well. For example, the German DAX is down 7.4% this year, and the Shanghai Composite has fallen almost 17%.
In the U.S. market, previous laggards like health care and financial stocks led the indices higher on Friday. But many analysts feel that in order for stocks to continue higher they must be supported by better earnings comparisons.
The continued rebound in crude prices also helped boost stock prices this week. WTI oil ended the week 2.4% higher at $39.44 a barrel. In contrast, safe-haven gold slipped 0.4% for the week to $1,253.80 an ounce.
At Friday’s close, the Dow Jones Industrial Average gained 121 points at 17,602, the S&P 500 rose 9 points to 2,050, the Nasdaq added 21 points at 4,796 and the Russell 2000 was up 10 points at 1,102.
The NYSE Composite’s primary exchange traded 2.6 billion shares with total volume of 6.3 billion. The Nasdaq crossed 2.7 billion shares. On the Big Board, advancers outpaced decliners by 1.6-to-1, and on the Nasdaq, advancers led by 1.8-to-1. Block trades on the NYSE increased to 8,492, up from 6,232 on Thursday.
For the week, the Dow Jones Industrial Average rose 2.3%, the S&P 500 gained 1.4%, the Nasdaq was up 1% and the Russell 2000 advanced 1.3%.
The rally from the February closing low at 15,660 in the Dow Jones Industrial Average has been unexpected, but no more so than the rally from the August bottom at 15,666. Both pierced the 200-day moving average, and so far the current rally has failed to close above the resistance line at 17,655. Friday’s high volume was due to options expiration.
But the recent rally in the Dow Jones Transportation Average is not at all similar to the August rally except for one item — high volume on Friday due to options expiration. Both rallies failed at the bearish resistance line, and the transports still must exceed that line, as well as the overhead line at 8,260. The all-time high for the Dow Jones Transportation Average is at 9,310 made on Nov. 28, 2014.
Conclusion
Despite the similarities to the August/September bottoms/rallies, other positives have developed that may help equities punch to new highs. For instance, crude oil has extended its rally (though at the current level is overbought), and the U.S. dollar has turned down.
However, divergences are still evident. Small and mid caps are lagging, and Friday’s high volume was due, at least in part, to options expirations.
Nevertheless, the big caps are leading and some small-cap stocks, like the Trade of the Day Skechers USA Inc (SKX), are still undervalued.
Still, with over 85% of the S&P 500’s stocks above their 50-day moving average, it is no time to be 100% invested. The stock market is overbought and due for at least a modest correction.
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.
