Stocks rebounded from some early weakness Monday, continuing the upward momentum seen last week in the wake of Friday’s better-than-expected jobs report. There was some negativity in the European session on worries the European Central Bank might under deliver on new stimulus at its eagerly awaited policy announcement on March 10.
Heading into another crucial central bank meeting, here is some evidence investors are cooling their heels after a powerful, nearly month-long rebound out of the Feb. 11 lows.
In the end, the Dow Jones Industrial Average gained 0.4%, the S&P 500 wafted up 0.1%, the Nasdaq Composite lost 0.2% and the Russell 2000 ended with a 1.1% gain. Elsewhere, Treasury bonds weakened, the dollar lost 0.2%, gold dropped 0.5% and crude oil gained 5.7% to close at $37.96 a barrel to return to the December trading range.
The gain in oil was driven by a smaller-than-expected inventory build at the Cushing, Oklahoma hub. Other factors include Friday’s U.S. drilling rig count decline (lowest level since December 2009) and ongoing talk of a possible Russia-OPEC production freeze agreement. Analysts at Citigroup chimed in saying crude prices may have reached a bottom.
Commodities in general were in focus after iron ore futures surged nearly 5% to their upside limit in China, up 19% in Singapore on expectations that Beijing will demand production cuts to reduce air pollution in the Hebei province as well as alleviate a chronic oversupply situation.
Energy stocks led the way with a 2.4% gain followed by materials, which gained 1.2%. The Metals & Mining SPDR (NYSEARCA:XME) recommended to Edge subscribers gained another 6.2% to bring its total gain since recommended on Feb. 17 to more than 26%. Gold mining stocks continued their meltup as well, with First Majestic Silver Corp (NYSE:AG) adding another 9.8% to bring its total gain since first recommended to subscribers in November to 70%.
Technology stocks were the laggards, with Netflix, Inc. (NASDAQ:NFLX) down 6% on concerns over domestic streaming users.
With the S&P 500 up for five days in a row, there is building evidence that we’re in the midst of a short-term oversold condition, vulnerable to a pullback on possible disappointment from the ECB this week or the Federal Reserve’s policy decision on March 16.
Remember, that the Fed’s official forecast from December still indicates an expectation for four quarter-point rate hikes in 2016; whereas the futures market only expects a single rate hike this year.
Over the weekend, Goldman Sachs analysts noted that market may be too complacent given that Fed policymakers are unlikely to have seen such as large dovish shift over the last three months. They believe the Fed’s updated Summary of Economic Projections or “dot plot” will indicate three rate hikes this year.
Hints of policy hawkishness were seen from Fed Vice Chair Stanley Fischer today when he noted that inflation pressure was building as the job market continues to tighten. His comments pushed large-cap stocks off their highs to test into negative territory as trading entered the final hour.
Most of the market is extended now, with more than 80% of S&P 500 stocks above their 50-day moving average — a high not seen since the summer of 2014.
With that in mind, I have started recommending Edge Pro subscribers start booking long-side profits including a 114% gain in their March $5 calls in Mexican cement maker Cemex SAB de CV (ADR) (NYSE:CX) and a 83% gain in their March $100 Apple Inc. (NASDAQ:AAPL) calls.