For yet another week, the market was caught in sideways action. The Dow again set a new record closing at a new all-time high of 16,583.34. The Russell 2000 Index, which has struggled of late, closed up 0.89 percent. The Nasdaq also appears to have found support as it gained 0.50 percent on the day. The S&P 500, which was down most of the day, rallied to close up 0.15 percent
While the evidence suggest the selling may be close to finished, there’s still a small risk that the Russell 2000 breaks lower and the rest of the market follows. That said, the chart of the Russell 2000 looks similar to autumn 2012, just before a rally commenced and carried into 2013. As it turned out, the rally ignited one of the best years for stocks in two decades.
Bottoms are usually made when the picture is cloudy. While market lows are clear in hindsight, it is often difficult in the present to clearly identify them. Investors who were waiting for more selling in Internet and biotechnology names may be the fuel for a strong rally if they decide to buy these sold off shares. These sectors again experienced losses on the week, though biotechnology didn’t break to a new low, which is positive. If investors sense a bottom in these funds, it could be the catalyst that decisively turns the market higher over the next few weeks.
Telecom, consumer staples and energy climbed to new 52-week highs this week, though utilities did not. Financials slipped lower early in the week as bad news from some of the largest banks weighed on the sector.
Janet Yellen’s testimony this week didn’t do much to change the direction of stocks. On Wednesday, stocks moved higher and some headlines gave her House testimony credit. The primary issue moving forward is the Federal Reserve’s taper and credit growth. As the Fed reduces the taper, it creates another headwind for the markets. Investors are worried that the Fed exit will allow deflation to become a threat, which is why they are moving into bonds and high yielding equities.
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