Well, what a difference a day makes.
Thursday was all malcontent concerning the aggressive new stimulus push by the European Central Bank, which included an interest rate cut, an expansion of its bond buying program both in terms of purchase pace and in terms of what is being bought and a new bank lending program. So, pretty much the kitchen sink was thrown at the problem.
But investors were taken aback by comments from ECB chief Mario Draghi that interest rates weren’t likely to be cut again given concerns over structural issues with negative interest rates. This fueled fears that monetary policy stimulus is both reaching its limit and has become ineffective.
Friday, investors apparently reevaluated the package and decided the shift away from negative rates (which are bad for bank earnings) and an embrace of unconventional tools (so-called “helicopter” money was even discussed at Draghi’s Q&A) was a good thing.
In the end, the Dow Jones Industrial Average gained 1.3% to cross its 200-day moving average for the first time since December, the S&P 500 added on 1.6%, the Nasdaq Composite wafted up 1.9% and the Russell 2000 finished the week with a 2.2% gain.
Meanwhile, Treasury bonds weakened, the dollar went up, gold lost 1.7% and crude oil gained 1.9%, closing at $38.54 a barrel.
Adding to the positive mood was some bullish headlines for energy prices, with the International Energy Agency arguing that while the worst may not be over for oil prices, there is building evidence that prices may have bottomed out. They highlighted production cuts from U.S. shale and non-OPEC products and a belief that a ramp up in Iranian output may not be as dramatic as Tehran has boasted about.
Goldman Sachs played devil’s advocate, arguing that supply adjustments are only now starting to happen and that sustained low prices may be necessary to ensure weak producers forced to fold from financial stress.
Financial stocks led the way with a 2.7% gain as negative interest rates look to be deemphasized by policymakers. Energy stocks followed with a 2.2% rise. Beauty retailer Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) gained 17.3% thanks to a big Q4 earnings per share beat on better-than-expected comp-store sales growth of 12.5% and strong margins. Hertz Global Holdings Inc (NYSE:HTZ) gained 12.3% on an analyst upgrade from Morgan Stanley on confidence in a new strategic course by management.
On the downside, El Pollo LoCo Holdings Inc (NASDAQ:LOCO) dropped 8.2% on weak traffic and weak guidance.
Looking ahead, all eyes are on the Federal Reserve’s policy announcement and Summary of Economic Projections or “dot plot” update on March 16. The consensus is that despite a recent rise in core inflation — driven by rental rates — Fed officials are likely to wait until June to hike rates again as wage growth remains tepid.
There are also a number of important economic data points on deck, including February retail sales and an update on the inflation rate. We will also see the latest Job Opening and Labor Turnover Survey data, which is well known as one of Federal Reserve Board Chair Janet Yellen’s favorite reads on the job market.
I think the risk is high for some disappointment, either in the form of a surprise rate cut or ongoing tension between Iran and other OPEC countries concerning a supply freeze deal.
While the Dow enjoyed a short-term breakout Friday, it’s contending with massive overhead resistance from a two-year downtrend pattern. A reversal here would put support at 16,000 back in play.
In response, I recommended clients book profits from the impressive rally over the past month including a 24% gain in the Metals & Mining SPDR (NYSEARCA:XME) recommended to Edge subscribers on Feb. 17.
Edge Pro subscribers enjoyed a number of big winners in this recent trade sequence as well, including a nearly 200% gain in the Feb $79 calls on Exxon Mobil (NYSE:XOM).
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
