Stocks Stage Strong Rebound

Market Outlook

The major equity indexes finished with a second consecutive week of gains and recovered their losses from the brief price pullback that dropped equities 4%. The updated graph shows the Nasdaq 100, S&P 500 indexes up year-to-date, the Dow Jones Industrial Average is at break-even and Russell 2000 still down for the year.

Traders dismissed geopolitical concerns to deliver a solid week of gains. The end of mostly good second-quarter earnings season helped sustain equity prices. Biotechnology and technology stocks were the biggest winner for the week. Also, it helped that recent data shows prices for goods and services are still in check and consumer spending still flat. Investors took this as an indication that the Federal Reserve will continue supporting the economy with its ultra-low benchmark rates.

Market watchers will be waiting see what comes out of the Federal Reserve’s annual economic symposium in Jackson Hole, Wyoming at the end of the week. At the symposium Federal Reserve Chair Janet Yellen and European Central Bank (ECB) President Mario Draghi are expected to update their view on state of economic growth and monetary policy projections. Housing is one sector of the economy that Federal Reserve Chair Janet Yellen has highlighted as an area of concern based on the slow pace of the recovery in the housing market, the other is the job market. ECB Head Mario Draghi speech will be closely watched after he warned earlier this month that the dual crises in Ukraine and the Middle East pose a “heightened” threat to economic growth in Europe. The ECB held rates steady for a second-straight month, but Draghi acknowledged that European economic momentum had slowed and new geopolitical tensions would only do more harm.

Our Market Outlook commentary has said recently “...Buying stock market dips has been a very profitable strategy this year. Declines in the S&P 500 index have lasted an average 1.5 days…using dips to get better prices on stocks you have been eyeing has generally paid off…the S&P 500 index has recovered its losses from each price pullback …” In the updated chart below you can see that treasury bond prices continued to soar even as equity prices recovered this past week. As the apparent escalation of the conflict in eastern Ukraine made headline news many traders took that as an opportunity to bid on U.S. stocks that been sold off. Ukraine reporting that it armed forces attached a Russian armed column that entered Ukraine motivated investors to rush into treasuries which sank yields to their lowest level in fourteen months.

Investor Analysis

According to the Stock Trader’s Almanac the prospects for full-month August gains have improved. In the last 22 years, when the S&P 500 was positive in August through the ninth trading day it went on to post a full month gain in seven of nine years. In these nine years August finished with a well-above average gain of 2.0% however, the bulk of the move was usually completed by the ninth trading day as S&P 500 only averaged 0.5% from the ninth trading day to the end of the month. 

Brian Reynolds, chief market strategist at Rosenblatt Securities in New York, believes tech, healthcare and large-cap biotechs are in position to lead the U.S. stock market higher for the next several weeks. He sees the S&P 500 rising on Monday if tensions do not become worse. "If Russia does not escalate, stocks are likely to open above the 1,960 they were at earlier today as people who put on knee-jerk shorts cover," he wrote late on Friday. If this analysis is accurate, now might be an opportune time to bid on some of the stocks in the best performing sectors.

As displayed in the updated graph below, over the past 90 days the biggest winners in the equity market continue to be technology and healthcare stocks. However, equities bullish move over the last few weeks have catapulted some other sectors into the picture. Especially Cyclical and Material stocks which tend to perform well as the economy expands which increases demand for products associated with these companies. Historically speaking, the consumer sector tends to begin its favorable period near the end of September and typically remains strong until the beginning of June in the following year.

 

By Gregory Clay

Investment Strategist

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