U.S. equities bounded higher again on Friday, capping a nice two-day rise that took the Dow Jones Industrial Average back over the 16,000 level on increased chatter of fresh monetary stimulus by the world’s major central banks.
There has been chatter from the European Central Bank, the Bank of Japan and the People’s Bank of China (via the Chinese media).
The one remaining is the Federal Reserve. Any indication that the Fed’s December forecast for four quarter point rate hikes in 2016 is no longer accurate — and has moved closer to the futures market expectation for only a single rate hike this year — would really get the bulls excited.
In the end, the Dow Jones gained 1.3%, the S&P 500 gained 2%, the Nasdaq Composite gained 2.7% and the Russell 2000 finished the day 2.4% higher.
Treasury bonds weakened, the dollar strengthened, gold was little changed and oil rose sharply with West Texas Intermediate rising 9% to close at $32.19 a barrel.
A winter storm in the northeast is driving demand-side hopes of increased energy usage. Citigroup was also out with a note talking up how oil could be the trade of the year, arguing that prices should hit bottom within one to three months and post gains in the second half of the year.
Morgan Stanley pointed out that crude is likely being helped by a short squeeze as $1.2 billion in new shorts were added on Wednesday alone.
No surprise then that energy stocks led the way higher today, rising 4.3% as a group. Oil services major Schlumberger Limited. (NYSE:SLB) rose 6.1% after reporting largely in line fourth-quarter results as investors were pleased with cash flow, a $10 billion buyback announcement and strong cost control, including the announcement of 10,000 job cuts.
On the downside, American Express Company (NYSE:AXP) lost 12.1% after issuing disappointing 2016-2017 guidance on rising competitive pressures. General Electric Company (NYSE:GE) lost 1.2% on a Q4 earnings beat that was seen as low quality since it relied on lower taxes and lower expenses as revenue growth missed.
Looking ahead, Apple Inc. (NASDAQ:AAPL) gained 5.3% after Piper Jaffray issued positive comments previewing its earnings release next week. They are looking for stock price upside of more than 50% on the launch of the new iPhone 7 in September.
Another factor lifting the market is the fact that stocks were simply badly oversold. According to the Bespoke Investment Group, the S&P 500 has been more than two standard deviations oversold for 11 straight trading days — something that is extremely rare.
Also, just 11% of the stocks in the S&P 500 were above their 50-day moving averages. So we were due for a rebound.
After bagging short-side profits earlier in the week, Edge subscribers are enjoying a near 6% gain in their new iShares Russell 2000 (NYSEARCA:IWM) position. Edge Pro subscribers are enjoying a near 60% gain in their Feb $28 puts against the iPath Short-Term VIX (NYSEARCA:VXX), an aggressive bet that volatility will melt lower over the next week or two.
Turning back to the central banks, it will be all about the Federal Reserve next week as the FOMC concludes a two-day meeting on Wednesday. Deutsche Bank economist Joseph LaVorgna is looking for a more cautious tone “given the sharp decline in global equity markets and further appreciation of the dollar.”
Other economic data points to watch include: Q4 GDP and the employment cost index (Friday), durable goods orders (Thursday) and consumer confidence (Tuesday).
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.
