Several benchmarks hit new highs this week as the Dow crossed the 11,000 level for the first time in 18 months. At the close on Friday, the Dow sold off slightly to close just under 11,000, but was still up 0.6% for the week, while the S&P 500 gained 1.4% and the Nasdaq rose 2.1%.
Source: MSN Moneycentral
Masters week tends to be a quieter week on Wall Street, as many traders are preoccupied by the golf tournament. The stories surrounding the Masters this year certainly added to the attention, so it’s not surprising the volume was a bit light. When markets hit new highs, it is important to consider the volume of trades on that day. A high volume shows conviction while low volume does not show conviction. The new highs in the market and low volume this week don’t show us a conviction in the rally that we would like to see (although that probably can be said about the rally the entire past year).
As you can see in the chart on the right, the market has risen for two months without a significant pullback. While that may sound and look good, it is becoming worrisome to us. Markets don’t go straight up forever, and we worry that a correction may be coming. Trying to time the market is usually a losing proposition, but a rise this long without a pullback is keeping us on our toes. Besides, a healthy market doesn’t always go straight up. Pullbacks that spur more buying indicate a healthy rally and a conviction in the upward market.
The market had a modest sell off Wednesday, with the Dow losing over 100 points at one point. The Federal Reserve Bank of
Besides the stock market, other benchmarks reached new highs this week. Oil climbed above $87 per barrel, despite closing the week around $85. The 10-year bond yield rose above 4% this week, but also fell as the week progressed. Gold reached new highs for the year, as well. Despite the lack of volume this week, these rising benchmarks show the economy is improving as solid economic reports continue to be released.
The upcoming week marks the beginning of earnings season. Dow component Alcoa releases earnings on Monday and will set the tone for the week. Alcoa sold off strongly Friday after it was downgraded by JP Morgan, so it will be interesting to see how it fares once its earnings are released. Analysts predict that corporate earnings as a whole will rise substantially, so it will be interesting to see if the market pushes higher, or if the highs we saw last week are in anticipation of good earnings this week. In addition to earnings releases, several economic reports are on the calendar for next week, including the Consumer Price Index, retail sales, and housing starts.
Where are we investing now?
We saw a slight pullback this week, but the markets still pushed higher. We will be looking to see if solid earnings releases push the market higher from here. Stocks have risen sharply over the past two months and we would not be surprised to see a pullback in the near term. At any rate, we remain optimistic in the short term, but cautious. We continue to believe the easy money and simulative measures currently in place will help the markets higher. Higher interest rates, higher taxes, increasing government involvement in the private sector, and a still-high unemployment rate have us worried for the longer term.
In equities, we are focusing on higher-quality and multi-national stocks. Bank stocks should be avoided, as a troubling article in the Wall Street Journal showed they were hiding some of the risky assets from their balance sheet. We are still bullish (optimistic) on commodities and believe that government policies will weaken the dollar in the long term, despite its recent rise. TIPs continue to be a favorite, as we expect inflation to increase in the future, though benign at the moment.
Have a good week.
