Stocks Close Up as Wall Street Posts Another Good Week

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It was another exciting week on Wall Street as the majority of stocks continued to befuddle the most pessimistic pundits as stocks close up. During the holiday-shortened week, stocks took their cue from better-than-expected earnings reports and some unexpectedly strong economic data. It was the ‘bulls’ third-straight weekly win for the month of January and it’s the best start for a new year dating all the way back to 1987. And, what’s even more confusing and surprising is that the worst stocks of 2011 are now the new leaders of the still young 2012. It is interesting to note that according to the Bespoke Investment Group, the 50 worst-performing stocks in the Standard & Poor’s 500 index last year, for example, have jumped by nearly 11% this year, while 2011’s 50 best stocks are up just 2% over this same time period. Topsy-turvy to say the least!

With just over a week to go for the month of January, stocks continued to put up higher prices, especially within the technology and financial sectors. With strong earnings numbers from the likes of IBM and Bank of America, the Dow rose by 298.42 points, or 2.4%. The broader Standard & Poor’s 500 Index jumped by 2%, and hit the 1,315.38 mark. It was its first weekly close above the 1,300 mark since last July. The tech-heavy Nasdaq Composite gained 2.8%, as it was helped by strong fourth quarter profits from both Microsoft and chip maker Intel. The smaller-cap stocks as represented by the Russell 2000 was also not to be denied, as this index was higher by 2.7 percent and continues to outperform the Dow and the S&P 500 for 2012.

The year-to-date statistics are remarkably strong for the New Year and stand as follows: the Dow, up 4.12%; the S&P 500, up 4.59%; the Nasdaq, up 6.97%; and the Russell 2000, up 5.9%.

There are a couple of important technical signs to take into consideration, as the massive gains of the New Year have surprised even the most optimistic analysts. A few issues to consider that might lead to a near-term pullback would be both the short interest levels and the Chicago Board of Options Exchange Volatility index, or VIX. Short interest – the level of investors who are betting on stocks to drop – is at its lowest level in at least a year. This means that buying from short covering is more than likely exhausted for the time being. The VIX, or fear gauge, is down to levels suggesting rising complacency on the part of investors. It wouldn’t take much of a bearish surprise to create a near-term drop. We could see some consolidation around the 1,300 level on the S&P 500 until either the earning’s picture continue to be impressive or Europe moves closer to containment. That is the short-term picture. Looking out to the year ahead, we still could see more upside as the “muddle through’ economy becomes the greater driver of stock prices and thoughts of a European implosion can barely be seen in the rear view mirror.

Treasuries surrendered some of their recent gains this past week as the most recently released economic data continues to paint a brighter picture for the overall U.S. economy. In addition, we had some decent news out of the European region, as it appears that the sickly European nation’s debt problems might be lessening. The 10-year benchmark note’s yield rose to 2.028%, from 1.871% at the end of the previous week. Meanwhile the 30-year bond’s yield rose to 3.099% by late Friday, which was above the 2.915% from the week prior. Remember, bond prices and interest yields are inversely related.

As far as economic news goes for this week, the highlights are the Federal Reserve’s Federal Open Market Committee statement and the advance report on Friday for fourth quarter gross domestic product. In addition, we’ll have more housing updates posted with pending home sales and the FHFA home prices report out on Wednesday, and new homes sales on Thursday. We’ll also see some important data as to the recent manufacturing momentum with the durable orders figures out on Wednesday. The mood of the consumer will be updated on Friday with the all-important consumer sentiment report.

As we head into the month of February, don’t be surprised if we have a pullback of some sorts within the next week or two, as these equity markets have run awfully fast over the past three weeks. A pause in this most recent rally would be actually welcomed, as we all know that ‘trees don’t grow to the sky.’ Until next week, take care!

 Sources: Barron’s, Wall Street Journal, Assoc. Press, Econoday, Bloomberg, Dow Jones & Co., Bespoke Investment Group


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