Just when it looked like the rally was about to run out of fuel, yesterday the Federal Reserve injected some high octane into the market’s engine. The Fed plans to buy up to $300 billion in long-term U.S. Treasury bonds and raise the size of lending programs already aimed at reducing mortgage rates by another $750 billion – all within the next six months.
The impact of the announcement drove both the stock market and bond markets higher. The 10-year U.S. Treasury Note rose almost four points, driving its yield down to 2.55%. Gold rose by more than $23 an ounce. The only money instrument that didn’t rally was the U.S. Dollar Index and it fell 2.7% to the lowest level since January.
The Wall Street Journal reported that the move could lead to lower mortgage rates and more favorable spreads for the banks. But it could also lead to a sharp increase in inflation later this year.
The financial sector had another big day resulting from the Fed’s move and so did technology. Sun Microsystems (JAVA) rose more than 78% on a Wall Street Journal article that said it was in talks with IBM to take the company for $6.5 billion in cash.
And Oracle (ORCL) gained 2.79% on an expectation of a solid earnings report after the closing bell. The company delivered, beating earnings forecasts and declaring its first-ever dividend.
The Consumer Price Index (CPI) rose 0.4% in February for the second increase in a row. It was also a tenth of a percentage point higher than expected and analysts said that its increase was primarily due to higher prices for gas, clothing and cigarettes.
By the close, the Dow Jones Industrial Average (DJI) gained 91 points at 7,487, the S&P 500 (SPX) was up 16 points at 794, and the Nasdaq (NASD) rose 29 points to finish at 1,491.
The New York Stock Exchange traded 2.1 billion shares with advancers ahead by almost 5-to-1, and on the Nasdaq 989 million shares were exchanged with advancers ahead of decliners by 5-to-3.
The May crude oil contract, which had heavier volume than the April contract, fell $1.14 to $48.90 a barrel, and the Amex Energy SPDR (XLE) rose 44 cents to $43.92. Crude oil futures hit more than $50 a barrel this morning for the first time since Jan. 6.
The April gold contract rose $57 to $946.10 an ounce as a hedge against future inflation. The PHLX Gold/Silver Index (XAU) gained $10.42 to $129.54. In after hours trading, gold rose 5.7% in response to the weaker dollar and potential inflation as a result of the Fed’s decision to buy Treasury bonds.
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What the Markets Are Saying
I confess to being surprised by the extent of the current rally, even after many times warning our readers that bear-market rallies tend to be sudden, violent affairs.
Nevertheless, the facts point to the dramatic advance of the past 10 days (the best seven-day rally since 1939) as still nothing more than a rebound following a sell-off that took prices to a level that had to be attacked by bargain hunters and patient investors alike.
Now, however, the easy part is behind them and as the S&P 500 (SPX) moves in on the 800 to 820 area, it is bound to not only find it harder to advance but the chances of a dramatic reversal are very high. Just as the internal indicators at SPX 666 were grossly oversold, now they are grossly overbought. And with an increase in inflation staring us in the eye, the specter of “stagflation” is already being discussed.
It is clearly too late to jump on the long side of the market. But it may not be too early to buy into the contra-Exchange-Traded Funds (ETFs) and precious metals for both trading and for hedging portfolios against the inevitable and impending sell-off. Despite all of the hoopla the market still belongs to the bear.
Today’s Trading Landscape
Earnings to be reported include: 3Com Corp, Alloy, Barnes and Noble, Blockbuster, Books-A-Million, Bowne & Co, Companhia Energetica de Minas Gerais, Cost Plus, CRA Int’l, Cross Plus Inc Nagoya, Discover Financial Services, and Elixir Gaming Technologies.
FedEx, GNC Corp, Neogen, NewYork & Co, NTN Buzztime, Palm, Perry Ellis Int’l, Photomedex, Playtech Ltd, Progress Software Corp, Prudential PLC, Ross Stores, Saraiva S.A., Shoe Carnival and Sterling Chemicals.
The Cato Corp, The Children’s Place Retail Stores, The Marcus Corp, Ticketmaster Entertainment, Tsakos Energy Navigation Ltd, Ulta Salon, Cosmetics & Fragrance, and Winnebago.
Economic reports due: Initial Jobless Claims for March 14 week (the consensus expects +7K), February Conference Board Leading Indicators (the consensus expects -0.6%), March Philadelphia Fed Business Index (the consensus expects -38.7), DJ-BTMU Business Barometer for February 7, and DEIA Natural Gas Inventories for March 11.
Citigroup (C) analysts said that GE Capital analysts are “too optimistic.” Citi is planning a reverse split, as well as a swap of common for preferred shares.
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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.
