Last week, stocks continued their rebound from the edge of the abyss. Investors responded positively to a dovish combination of comments from Speaker of the House John Boehner and new Federal Reserve Chairwoman Janet Yellen. Mr. Boehner said he would not pursue another acrimonious battle over the debt ceiling. And Ms. Yellen signaled that the Fed will do the “right thing†for the economy when it comes to appropriate liquidity and data-dependent accommodative policy.
Among the ten U.S. business sectors, the leaders last week were Materials, Energy, Utilities, Technology, Telecom, and Healthcare. Utilities and Healthcare are still the top performers so far in 2014, which isn’t a surprise given that most of the major market averages are still in the red (with the exception of the NASDAQ Composite), but Technology also is now safely positive year-to-date by more than +2%. The other seven sectors are still negative.
Rather than the rapidly rising long-term interest rates that everyone feared was the imminent impact of Fed tapering, the risk appears to be to the downside for yields, at least in the near term. It seems that the secular bear market in fixed income is not quite ready to launch after all, and both equities and bonds are seeing capital inflows, just like they did before the Fed announced its tapering plan.
Corporate earnings have been looking passable, although definitely not stellar. Certainly one positive driver for U.S. firms has been the weak dollar. Other positive developments for global economic recovery include news that Chinese banks disbursed the highest monthly volume of loans in four years, upbeat economic data in the Eurozone, plus new political initiatives in Italy to form a new government coalition that might be able to address its severe economic malaise.
Furthermore, there remains a general lack of euphoria, if not outright pessimism, during this bullish recovery. Short interest on S&P 500 stocks remains near 3-year highs, individual investors are still largely underinvested in equities, and prominent Wall Street investment strategists are predicting only modest gains in 2014. In other words, there is plenty of potential fuel on the sidelines that could power further stock market gains.
Last week I spoke of the market approaching a crossroads that would likely culminate in either a bullish breakout or a bearish reversal back down to test the 200-day SMA and perhaps an even deeper correction. Well, the market now finds itself at that crossroads as we enter the holiday-shortened week. I remain optimistic, and one reason is that there is really no attractive investment alternative to equities for total return. The path of least resistance is up.
SPY chart review:
The SPDR S&P 500 Trust (SPY) closed Friday at 184.02, which is back within spittin’ distance of its all-time high of 184.94. The bullish reversal last Wednesday from its 12-month uptrend line seems to have confirmed. However, the Russell 2000 small caps, which had endured a serious violation of a similar 12-month uptrend support line, has recovered back up to that line, and is now dealing with it as overhead resistance. Nevertheless, all markets have staged an impressive comeback from the edge of the abyss. The SPY has blasted back through potential lines of support-turned-resistance at 177.50 and 180. In fact, I have drawn what in retrospect might have been a bull flag pattern.
