On the surface, last week’s gains suggest the market’s back into the familiar bullish groove that it was in over the five months before the February/March pullback. After all, it was the second winning week, and we’re knocking on the door of new multi-year highs.
There are a couple of subtle flaws with the rally though. These may end up being non-issues, but considering circumstances in which stocks have bounced back since the low from three weeks ago, being skeptical is the same as being prudent.
First things first though – a look at the bigger economic picture.
It was a wildly busy week last week in terms of economic data, with most of the numbers concerning whether or not consumers were employed, and how much they were making at their jobs (and how much they were spending).
As it turns out, a net of 216K folks are working again, which was just enough to pull the unemployment rate down to 8.8%. The number jives with ADP’s employment growth of 201K jobs, and the 38.6% reduction in Challenger’s job cuts number. Likewise, initial claims fell a little to 388K, and continuing claims inched lower to 3.714 million.
There’s a number you’re not hearing though that rounds out this scenario with a dose of ugly. There are fewer Americans working now than there were in late 2009 when the economy was supposed to be well on the way to a recovery.
That said, the people who are working are seeing modest increases in income. Incomes were up 0.3% in February – the sixth straight month of pay growth, though the average hourly wage didn’t budge in March. And, just like old times, spending growth of 0.7% outpaced income growth in February.
Consumer confidence was March’s biggest victim, falling from 72 to 63.4. Bear in mind, however, that may have been the knee-jerk response to Japan’s earthquake and tsunami. It’s too soon to call this a red flag.
As for the coming week, there’s next to nothing in the lineup.
(Click charts to enlarge)
S&P 500 Index
All told, the S&P 500 (SPY) gained 18.6 points last week… a 1.4% gain. It’s now 6.7% above its low from two weeks ago (the post-Japan bottom). By most measures that would be momentum worth stepping into. There are a couple of problems though.
The first one is simply the lack of volume behind the move.
Though the NASDAQ (QQQ) and Dow (DIA) technically say more volume was behind last week’s gains than either did the week before, neither index has seen impressive volume behind either week’s gains compared with recent average volume levels. And as for the S&P 500, though it was up last week, it actually saw less volume last week than in the prior week. In fact, the S&P 500′s stocks saw their weakest volume last week since the holiday-laden last week of 2010. Where are all the buyers?
The second problem the bulls will need to address sooner than later if there’s to be any future for this rally is the upper Bollinger band. For the SPX, that’s 1346. For the Dow, that’s 12,477. (The NASDAQ’s is at 2846, which isn’t within immediate striking distance.) See, these upper Bollinger bands have at the very least contained the rally effort since last August, and ultimately jump-started both of the corrections we’ve witnessed between now and then.
Another modestly troubling detail the bulls might see in this daily chart of the SPX… the way the index peeled back from its highs late in the session on Friday; investors didn’t want to “take ‘em home” for the weekend. It’s an indication that confidence isn’t quite as high as the gain suggests it is.
Both are hints that the market may have just reversed back into bearish mode again, though we’ll need confirmation of this idea before committing to it. The fact is, both the S&P 500 and the VIX would have ideally reached their Bollinger band lines before making such a reversal effort. It’s worth watching all the same though.
Bottom line: We have to assume the trend in motion will stay in motion until further notice, which technically means we’re bullish following the cross above short-term moving averages two weeks ago, and last week’s follow-through. But, we also know there are more things working against stocks now than for them. Keep an eye out for what happens at 1346 (if we get there), and be ready to bolt if the S&P 500 falls back under its 20/50-day moving averages at 1308.
Market Valuation – Q4′s Actual & Q1′s Projected
It’s not quite our usual short-term trading fare, but since everything ultimately matters, here’s a quick look at the S&P 500′s latest valuation with almost all of its companies having reported Q4 numbers, and as we head out of Q1 and into Q2.
All told, it looks like the S&P 500 will earn $21.92 for Q4. On a trailing-twelve-month basis that translates into a P/E of 15.4. Like it or not, and believe it or not, that’s still about as cheap as the market’s been in years.
Moreover, as irritating as this may be to the gloom-and-doomers and the nay-sayers, earnings ARE getting better… the market’s undervalued from a valuation as well as a growth perspective. Indeed, the S&P 500 is expected to reach record quarterly earnings in Q4 of this year, and it’s not like the current growth pace has to change to reach those levels.
The materials stocks were back on top last week with a 4% gain, while tech’s recent rebound effort fell short – the tech sector only gained 1.2%. And if you’re wondering how the worst-performing sector ‘only’ gained 1.2% while the S&P 500 only gained 1.4% last week, it was the small caps doing most of the heavy lifting [a hint worth taking on its own, by the way].
For the more visual traders, here is the comparative performance chart (which adds transportation and real estate to the mix). In fact, it was the transportation industry that visibly came alive last week after struggling for so long. Similarly – and we saw this on the performance table as well – the utilities sector is working on a recovery after a multi-month struggle. Though a market wide corrective move isn’t apt to skip over those two areas, utilities and transportation are prime bullish targets for the next wave of sector rotation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.