Reversal of Trends as Stocks Move Higher

Stocks gain as apparent progress on resolving the European sovereign debt issues and improving economic data boosted equities this past week, and thankfully reversed the long running declines as of late. We had three-day winning streak which started on Tuesday thanks to some comments from Fed Chairman Ben Bernanke, but it was the big story in the Financial Times of London which stated that the European Union finance ministers were exploring new ways of recapitalizing financial institutions that really got stocks moving higher. And fortunately we had good news on Friday, with a better-than-expected employment report to close out another volatile week
With our reversal of fortunes, the Standard & Poor’s 500 index popped by some 2.12%, to a level of 1,155.46. Keep in mind that by technical analysis, the S&P 500 had managed to fall to as low as 1,075 last Tuesday, which is more than 20% down from its 2011 high of 1,363.63 on April 19. Luckily it turned higher by the end of that day, thereby avoiding the technical definition of a bear market. Meanwhile the Dow Jones Industrial Average closed higher on the week by 1.74%, while the tech-laden Nasdaq Composite finished higher by 2.65%, to a level of 2,479. In addition, the smaller-cap stocks as represented by the Russell 2000 also finished higher by 1.87 percent, although this major domestic index continues to lag its brethren.

For the year, the Dow Jones Industrial Average is now off by 4.10%; the S&P 500, down 8.12%; the Nasdaq, down 6.54 percent; and the Russell 2000, down 16.26 percent.Yields on U.S. Treasuries rose this past week thanks in part to rising stocks and the above mentioned economic data which showed some moderate growth. As Treasuries sold off, their subsequent yields rose. The yield on the benchmark 10-year note rose 16 basis points, to 2.08%, and the 30-year bond jumped by 12 basis points. (A basis point is 1/100 of a percentage points.) Meanwhile, the two-year note jumped by six basis points – a 25% increase – to 0.30%. The flattening of the yield curve reflects the Federal Reserve’s recent program of buying long-term securities and selling the shorter ones.This week marks the beginning of the third quarter earnings season, with the first big report due from Alcoa on Tuesday. Other more notable companies expected to report their results include: Gannett, WD-40, Host Hotels & Resorts, PepsiCo, Google, Adtran, Fastenal, Safeway Winnebago, J.B. Hunt Transportation, Mattel and J.P Morgan Chase & Co. Hopefully these reports will give us a better ‘handle’ as to how real or unreal the recent recovery really is.

Upcoming

Other than the earnings reports, it will be a relatively light week when it comes to economic news. The main report on the week will be Friday’s retail sales report, which should show consumers still spending at a moderately strong pace. Later that day, consumer sentiment will be released which could show an improving consumer mood due mainly to lower gasoline prices. Other data on the week with include the Fed minutes on Wednesday and Thursday’s international trade date update on export trends.

Let’s hope that as we progress through the month of October that all the talk surrounding new jobs packages, restructurings in the Euroozone, new stimulus in the form of a QE3, will lead to less volatility and a continuation of this latest upward trend in stock prices. Until next week, take care!!

Sources: Barron’s, Wall Street Journal, Associated Press, Econoday, Gorilla Trading, Dow Jones & Company, Briefing.com