The Past Week: Stocks Rally for 4th-Straight Week; Dow, S&P 500 Jump to New Highs!
Stock Market: Dollar Soars – Economy Improving!
Wall Street: New Fed Stimulus Talks!
by Ian Harvey
May 20, 2013
The stock market continued its march higher for a fourth week as investors focused on signs of improvement in the U.S. economy.
Stocks hiccupped this past week when the San Francisco Fed's Williams Thursday said tapering could come this summer, but for the most part, the market steadily moved higher. The Dow was down 42 points Thursday, but closed out the past week with strong gains, with the Dow and S&P 500 hitting fresh highs and all three major averages logging their fourth-straight weekly advance, boosted by a pair of positive economic reports.
For the past week, the Dow Jones Industrial Average (DJI) is up 1.6 percent to a new high of 15,354.
The Standard & Poor's 500 Index (SPX) closed the past week at 1,667, spiking nearly 150 percent since the financial crisis when the index hit a low of 666.79 on March 6, 2009.
Individual economic data points are proving to be volatile at times, but the average slope of the trend is positive -- things are improving at a slow rate.
On the economic front, consumer sentiment gained in May to the highest level since July 2007, according to the Thomson Reuters/University of Michigan index. And leading indicators rose in April, hitting its highest level in nearly five years, according to the Conference Board, suggesting an anticipated growth slowdown would be temporary.
Adding to positive sentiment, JPMorgan boosted its year-end price target for the S&P 500 to 1,715, sharply above the bank's original expectation of 1,580, which the index crossed above last month. So far in 2013, the index has surged more than 15 percent.
NOTE: 506% PROFIT SO FAR THIS YEAR!
Investor Concerns in Regard to the Fed in the Past Week
Stocks pulled back in the Thursday session, with the S&P 500 snapping its four-day win streak, amid mounting concerns the Federal Reserve may begin tapering off its bond-buying program.
However, the uncertainty caused by the Fed's discussion of an exit could create volatility, but the reality is that when it happens, it will occur simultaneously with economic improvement.
Thursday's comments, in the past week, by the Fed's John Williams and Charles Plosser suggested they were both open to reducing asset purchases in the near-future.
Cyclical Sectors in the Past Week
Even though the market seems to be overbought, it could keep going up for now, with cyclical sectors driving it.
Cyclical sectors have been the laggards and now are catching up. Financials were the best performers of the past week, up 3.7 percent, followed by industrials, up 2.2 percent. The telecom and utilities sectors, which led the market higher earlier in the year, were the week's laggards, up 0.4 and 1 percent respectively.
Many analysts expect the stock market to continue to move higher, but express the concern that it's showing signs of wear. One major concern is the fact that the S&P is 12 percent away from its 200-day moving average, which is a stretched valuation.
• The Dow Jones Industrial Average (DJI) soared 1.56 percent, to settle in the past week at 15,354.40
Cisco was the biggest gainer on the Dow for the quarter, and Intel was the worst weekly performer.
• The Standard & Poor's 500 Index (SPX) gained 1.98 percent in the past week, to finish at 1667.47.
All key S&P sectors finished in positive territory for the past week, led by financials and industrials.
• And the Nasdaq Composite Index (COMP) added 1.82 percent for the past week, to sit at 3498.97.
The COMP is up 15.9 percent for 2013 so far. On Friday, the Nasdaq closed at its highest level since October 2000.
The S&P 500 & Nasdaq have each had gains of at least 1 percent in each of the last four weeks. The last time that happened for the S&P was back in October 2011 and the last time the Nasdaq rose at least 1 percent for four-straight weeks was in February 2012.
Among other indexes for the past week, the Russell 2000 index (RUT) of small- and mid-cap stocks also surged to a record close. The index closed up 10.94 points, or 1.11 percent, at 996.28.
The dollar index was up 1.3 percent, and the 10-year yield ended the past week at 1.94 percent.
CBOE Market Volatility Index (VIX) ), widely considered the best gauge of fear in the market, couldn't hold its perch above 13, as it shed 0.6 point Friday, or 4.7%, to settle at 12.45, back south of its 10-day moving average.
The VIX lost 1.1% on the past week.
Even at the present levels that have been achieved, a popular options gauge shows investors are placing optimistic wagers on the stock market, positioning for the current run-up to extend for the next three months.
Earlier this past week, the Credit Suisse Fear Barometer, known as the CSFB Index, fell 11.4 points over the past two weeks - the largest decline on record - and is now at a one-year low of 21.73.
The indicator essentially tracks investors' willingness to pay for downside protection with zero-premium collar trades that expire in three months, using S&P 500 index (SPX) options.
This is an unusual phenomenon to see as at these levels as there are very few indications (based on options activity) that investors are expecting a pullback.
Also the CBOE Market Volatility Index (VIX) ), Wall Street's fear gauge, is down more than 1 percent for the week.
The options market is a popular place for investors to hedge against a sudden fall in the stock market. Among the most popular strategies are put options on the S&P 500 index, and call options on the VIX, which generally moves inversely to the S&P 500.
World Markets in the Past Week
Major European equity indexes climbed to highs last seen five years ago or more. This was helped by a rally in automakers' shares, which rose on signs of a revival in domestic sales.
Also, stocks on both sides of the Atlantic were boosted after a survey of U.S. consumer sentiment in early May rose more than economists had expected, with more Americans giving favorable views about their financial and economic prospects, particularly among upper-income households.
In a separate report by an industry group, a gauge of future economic activity also suggested the expected U.S. slowdown will be temporary, with the index rising in April to a near five-year high.
The two reports were encouraging after a raft of data on Thursday had suggested U.S. economic growth is cooling.
The dollar's strength was largely attributed to the euro, which fell to a six-week low on talk the European Central Bank could introduce negative deposit rates, a move that effectively would make banks pay to park their cash overnight with the ECB. The ECB had no immediate comment.
The U.S. Dollar Index (DXY), which measures its value against a basket of six major currencies, rose to 84.371, its highest in nearly three years in the past week. Around midday, on Friday, in New York, the dollar index was up 0.81 percent at 84.266.
Earnings Reports for the Past Week
So far, 93 percent of S&P 500 companies have reported quarterly results, with 67 percent of firms topping earnings expectations and 24 percent missing forecasts, according to the latest data from Thomson Reuters. If all remaining companies report earnings in line with estimates, earnings will be up 4.8 percent from last year's first quarter.
Meanwhile, sales have come in 1 percent on average.
• Kansas City Southern will replace Dean Foods in the S&P 500 after the market close this coming Thursday.
• J.C. Penney (JCP) shares slid after the ailing retailer reported another massive loss.
The losses came during a quarter in which J.C. Penney announced the departure of CEO Ron Johnson, a former Apple (AAPL) retail executive hired in 2011 to revive the floundering chain.
Mike Ullman, the former CEO who took back the reins from Johnson, pledged to reemphasize the company's private brands and improve the performance of its online store.
• On the higher end of the retail spectrum, Nordstrom (JWN) shares sank after the company reported weaker-than-expected revenue growth and trimmed its sales outlook.
Where Earnings Stand To-Date!
Here is the summary for the 465 S&P 500 companies that have reported Q1 results, as of Friday May 17th, 2013.
Economic Reports in the Past Week
• Retail Sales
Retail sales data came in stronger than expected for the month of April. Retail salesincreased 0.1 percent last month compared to a decline of 0.5 percent for March. This came in well ahead of consensus expectations which expected a decline in retail sales of 0.3 percent.
Excluding motor vehicle sales, retail sales fell 0.1 percent in April versus a decline of 0.4 percent in March. This came in slightly better than consensus estimates which called for a decline of 0.2 percent.
• Business Inventories
Business inventories growth was unchanged in March for the second straight month. This compared to consensus estimates calling for business inventories to increase by 0.3 percent in March.
Producer prices fell for the second consecutive month, falling 0.7 percent in April compared to a decline of 0.6 percent in March. This was more than the consensus estimate calling for a decline of 0.5 percent.
On a core basis, which excludes food and energy, PPI was up 0.1 percent for April and in line with the consensus. That came in slightly below the 0.2 percent gain for March.
• Industrial Production and Capacity Utilization
Industrial production declined 0.5 percent in April after rising 0.3 percent for the month of March. The consensus expected industrial production to fall 0.2 percent.
Capacity utilization was 77.8 percent in April versus 78.3 percent in March. This was the lowest level of capacity utilization since January. Economists expected the figures to remain unchanged at 78.3 percent. Manufacturing capacity utilization came in at 75.9 percent.
• Jobless Claims
Initial jobless claims rose to 360,000 for the week ending May 11 from an upwardly revised 328,000 for the week ending May 4. This compared to consensus expectations calling for an increase to 330,000.
Continuing claims fell to 3.009 million for the week ending May 4 from 3.013 million for the week ending April 27. This compared to the consensus estimate of 3.005 million.
CPI fell 0.4 percent in April after declining 0.2 percent for the month of March. This compared to consensus estimates calling for a decline in consumer prices of 0.2 percent.
On a core basis, which excludes food and energy, CPI rose 0.1 percent for the second consecutive month. This was slightly less than the consensus which expected prices to rise by 0.2 percent.
• Housing Starts
Housing starts declined by 16.5 percent in April to 853,000 from a downwardly revised 1.021 million in March. This was the lowest number of housing starts since November 2012. The consensus had expected housing starts to fall to 970,000.
• Philadelphia Fed
In a surprise reading, the Philadelphia Fed's Business Outlook showed that manufacturing activity in the Philadelphia region contracted in May. The index fell to -5.2 from 1.3 in April. The consensus had expected the Philly Fed Index to rise to 2.5.
• U.S. Consumer Sentiment
A survey of U.S. consumer sentiment in early May rose more than economists had expected, with more Americans giving favorable views about their financial and economic prospects, particularly among upper-income households.
Prices for U.S. Treasuries added to losses after the Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment rose to 83.7 in early May from 76.4 last month, topping economists' expectations for 78.
The May reading was the highest level since July 2007.
Conclusion for the Past Week
With the broad S&P 500 Index (SPX) gliding once again into uncharted territory and posting four straight weeks of gains, the talk of Wall Street's rally inevitably hitting a ceiling is starting to get old.
Concerns about a technical correction have been a hot topic for weeks, especially as the rally accelerated in May - the S&P 500 is up 4.4 percent so far this month and up nearly 17 percent for the year. But as the three major U.S. stock indexes inch higher and higher to set record after record, many analysts are shrugging off the pullback worries -- read more about the week ahead!