Just a week ago the stock market was looking quite vulnerable as most of the major averages closed near their lows last Friday, April 11. There were signs of heavy selling, so I concluded last week that "On a short-term basis, the market is getting oversold, so we should see a bounce this week. Unless it is quite strong, it will likely be an opportunity to become more defensive and raise some cash."
The higher close last Monday signaled the rebound was indeed underway and made Wednesday's action pivotal as a sharply lower close would have signaled that the rebound was over and that investors should prepare for a further decline.
Instead, Janet Yellen's clarifying comments at the Economic Club of New York seemed to calm the markets and bring in more buyers. She made it clear that the Fed would keep rates low as long as needed to be sure the recovery stayed on track.
She also seemed more worried about deflation than inflation as she said "inflation persistently below 2% could pose risks to economic performance." The Fed continues to think that the recent soft data is due in part to the very hard winter.
This has been dismissed by many analysts early, but I continue to think much of the weakness is weather related. This was the spring thaw I discussed in February. The concern that a weaker economy would not support the lofty stock prices was one of the reasons many bailed out of stocks, especially those with suspect earnings.
So far, the earnings season has not been as bad as many feared. To be sure, there have been some big misses but also some results that were much better than expected. This earnings season may end up as a positive for the markets.
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The S&P 500 closed higher each day last week and gained 2.7%, which was its best weekly performance since last July. The Nasdaq Composite was up 2.4% as the hemorrhaging in the tech and biotech stocks seems to be over. The sharp decline in these sectors and small-cap stocks is now looking more like sector rotation.
The % change chart of some of the consumer Internet stocks illustrated the wild swings, so far, in 2014. For example on March 4, Yelp Inc. (YELP) was up over 46% for the year, but as of last Thursday's close, it is now down 4.5%. Facebook Inc. (FB) has done a bit better as it peaked a few days after YELP and was up close to 32%. It is still positive for the year but now shows just a 7% gain.
Twitter, Inc. (TWTR) has spent very little time in positive territory this year, and even though it has bounced recently, it is still down over 33% for the year. In comparison, the PowerShares QQQ Trust (QQQ) looks relatively stable as after being up almost 5% in March it is now down 0.8%.
The weekly chart of the PowerShares QQQ Trust (QQQ) shows that the decline has not yet reached the 38.2% Fibonacci support at $82.57. Therefore, there is no evidence of a change in the major trend. The weekly OBV did drop below its WMA and violated the uptrend from the September lows, line a. It has held well above the long-term support at line b and turned up last week.
Most of the major global markets have had a rough time, so far, in 2014 with the German Dax down 1.5%, the Hang Seng Index dropping 2.5%, and Japan's NK225 even worse as it is down 10.9%. This poor performance, combined with the publicity blitz over Michael Lewis' new book, has given many investors a reason not to buy stocks. I think that the misguided emphasis of the financial media, which I pointed out a few weeks ago, did a disservice to the investing public.
According the AAII, the percentage of bullish investors is now down to 27.2% after reaching 55% at the end of 2013. This reflects the increasing fear of or distrust of the stock market by many investors. Though this is bullish for stocks, it may keep the public out of the market until it is much higher.
Though there are still concerns over the situation in the Ukraine and the health of China's economy, I see signs of continued improvement in the global economy. It was just two years ago that many analysts were predicting that Greece would drop out of the European Union and that it might totally fall apart.
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That is why I found this chart of Greek bond yields quite amazing as yields started to rise in 2011 when their economic plight worsened. In March 2012, the yield rose to over 30% after new austerity measures were passed and there were riots in Athens. Now the yield is below 6% and back to the levels seen in early 2010. Though the weaker Eurozone countries still have problems, they are getting better, which suggests to me that the Eurozone is on the mend.
The next couple of months of economic data will be important. Last week's Retail Sales rose 1.1%, which was the best gain in 18 months. The data for February was also revised upward leading many to conclude that the consumer was once again starting to spend. Nearly 80% of tax returns processed by early April resulted in an average tax refund of $2,792, which means consumers should have more to spend.
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The Housing Starts and Industrial Production reports were also out last week and both beat estimates. Industrial Production is in a steep uptrend as it is back to levels last seen in 2007. Housing starts are still below last year's level and the Housing Market Index was also weaker than expected. The data on the housing market will need to be watched closely in the months ahead as it is an important driver of economic activity.
Wednesday's release of the Fed beige book was quite encouraging as they reported that of the 12 regions there was "modest to moderate" expansion in eight regions." Most regions showed an improvement in manufacturing activity, though the Empire State Manufacturing Survey was flat last week. The outlook from the Philadelphia Fed Survey was much better as it jumped 7.6 points to its best level since last September.
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This week we get Leading Indicators on Monday, along with the Chicago Fed National Activity Index, which is a weighted reading of 85 monthly national economic activity indicators.
More data on the housing market will be released this week with Existing Home Sales on Tuesday, followed by New Home Sales on Wednesday. The PMI Manufacturing Index is out on Wednesday, and on Thursday we get the jobless claims and Durable Goods. The week ends with the final monthly reading on consumer sentiment from the University of Michigan.
What to Watch
The market last week was a tough call after the PowerShares QQQ Trust (QQQ) and iShares Russell 2000 Index (IWM) had broken more important levels of support the week of April 11. The odds of a failing rebound would typically be quite high.
By lunch time, Wednesday, the strong market internals (3 to 1 advancing issues over decliners) shifted the evidence to a positive view that was confirmed by the strong readings again on Thursday.
The new highs in both the weekly and daily A/D lines reinforce the bullish intermediate-term outlook while the volume analysis is still mixed. The weekly readings are positive while the daily OBV analysis is still lagging the price action.
Recent data suggests that many of the big hedge funds were hurt the most by the drop in the technology and biotechnology sectors. One $28 billion fund lost 4.2% in March and another 4%, so far, this month. Most also underperformed the averages like the S&P 500 in 2013.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.