April 6, 2014: Week End Market Perspective

Several major stock indexes climbed to new highs this week, before retreating on Friday. The most important of these was the Dow Jones Industrial Average, which hadn’t made a new high since the end of 2013. The failure of the Dow was a warning sign to the bulls, but the breakthrough tilts the sentiment to their favor – so long as it holds up over the coming days. It is also a positive sign given the Russell 2000 and Nasdaq remain in a short-term downtrend. The S&P 500 Index also hit a new high, which helps to reinforce the bullish outlook.

These highs confirm the bulls are still in charge, even the Russell 2000 and Nasdaq are still in the midst of a correction. Biotechnology bounced higher earlier in the week and then fell back on Wednesday, Thursday and Friday. Internet stocks also suffered big losses on Friday.

Utilities remained a bright spot this week, but it was energy shares that were the real standout, pushing higher this week. These two sectors are continuing their bullish moves from Q1 and are one important reason why the DJIA and S&P 500 have broken away from the Nasdaq and Russell 2000 recently.

Copper prices are back above $3 per pound and that has calmed investor concerns about China for the moment. Emerging markets bounced thanks to heavy exposure to industrial, energy and materials sectors, plus sentiment shifted in the bullish direction on China. Bears see the bounce higher in many emerging markets as a shorting opportunity though. The U.S. dollar is still in a bull market against emerging market currencies and until that changes, investors will do better playing the domestic side of the energy, materials and industrial sectors.

Economic reports released this week were mixed. The Chicago PMI came in at 55.9, a 4-point slide from last month and missing the 60 forecast.  This is still a bullish number, as results over 50 indicates a growing economy. The Markit PMI came in at 55.5, also showing a continued expansion in the manufacturing sector.

Services were strong as well. Construction spending for February was positive at 0.1 percent, better than expectations of a decline. Factory orders were up strongly in February too; both data points punch a hole in the theory that the weather caused the economy to slow. The trade deficit was worse than expected in February though, which pushed Q1 GDP forecasts lower (trade deficits lower GDP, trade surpluses increase GDP). Motor vehicle sales were well above expectations at 16.4 million units for March.

The big number today is the March unemployment rate, which held at 6.7 percent.  Employers added 192,000 jobs in March.  Moreover, January and February job numbers were revised upwards to 144,000 and 197,000, respectively.  The labor participation increased slightly to 63.2 percent.

While growth is still slow, we are seeing an improving economy, which will continue to help stock prices over the long-term. Given the run-up in 2013, investors should be satisfied with the modest returns experienced over the first quarter of the year.

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