The bulls responded with enthusiasm to comments in New York by Federal Reserve Board Chair Janet Yellen that talked up the downside risks to the economy, talked down the recent rise in core inflation measures and generally pooh-poohed the chances of an April interest rate hike.
Coming on the heels of some hawkish commentary from other Fed officials in recent days, this was exactly what investors still addicted to the Fed’s monetary largesse wanted to hear — keeping stocks on the knife’s edge between breaking above a two-year downtrend pattern or succumbing to a short-term oversold condition and falling back to support levels near the January-February lows.
In the end, the Dow Jones Industrial Average gained 0.6%, the S&P 500 wafted up 0.9%, the Nasdaq Composite finished 1.7% higher and the Russell 2000 ended the day with a 2.7% gain. Treasury bonds were stronger, the dollar declined sharply in the wake of Yellen’s comments, gold gained 1.9%, and crude oil lost 2.2% to close at $38.54 a barrel.
The weakness in energy prices boosted the ProShares UltraShort Crude Oil (SCO) 4.3% for Edge subscribers.
Technology stocks led the way with a 1.6% rise followed by utilities. Financials and energy stocks underperformed, rising 0.2% and 0.4% respectively. Several big-tech names were on the move, with Apple Inc. (NASDAQ:AAPL) up 2.4%, Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) up 1.7% and Microsoft Corporation (NASDAQ:MSFT) up 2.2%.
HD/4K vision system maker Ambarella Inc (NASDAQ:AMBA) gained 9.3% after being upgraded by analysts at Morgan Stanley on expectation of growth across the wearables, drones, auto, and consumer surveillance segments while the action cam market recovers from recent weakness. Solar energy play SunEdison Inc (NYSE:SUNE) dropped 54.8% on growing bankruptcy fears amid reports the company is suffering liquidity difficulties and is being investigated by the Securities and Exchange Commission for liquidity statements.
Back to Yellen.
She told the Economic Club of New York that caution in the pace of rate hikes was “especially warranted” given the Fed’s limited ability to respond to a new recession with interest rates already so low and negative interest rates having mixed success in Japan and the Eurozone.
She also highlighted concerns about slower global growth, tighter financial market conditions from the volatility seen earlier in the year, and uncertainty surrounding China’s currency valuation.
While the day’s gains were flashy — after all, nothing gets stocks moving like dovishness from the Fed — the overall situation remains vulnerable. Stocks and oil prices are extended after the impressive rally out of the February low. U.S. economic growth expectations, as shown above, have been cratering. Corporate earnings remain weak with the Q1 reporting season set to start in less than two weeks.
And market breadth continues to narrow as fewer stocks move with the uptrends at the same time interest in defensive Treasury bonds is picking up for the first time since stocks were rolling over in early January.
Caution is still warranted.
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.
