Market Update For February 21, 2014

U.S. stocks ultimately traded sideways this week after a push higher on Tuesday, a drop on Wednesday and a recovery bounce on Thursday. The Nasdaq remains the stronger of the major indexes, with a small gain coming into Friday. On another positive note, the Russell 2000 hit a new high for the week on Thursday.

Economic data was negative overall for the markets this week. The one bright spot was the U.S. PMI, which climbed to 56.7 and beat expectations of 53.6. A number over 50 signals expansion, which is very good news for our long-term outlook, as manufacturing is a leading index. An upturn or downturn in the manufacturing sector can take more than a year to filter through the economy.

Additionally, the strong manufacturing number is important for the markets as it means the Fed is likely to stay the course on the taper. For that reason, we are placing more weight on that PMI number than on the slew of negative data that came out. The worst number was probably the Chinese flash PMI for February, which shows their manufacturing sector in contraction.

Housing data was weak as well, but that didn’t dent the home builders, which have traded roughly in line with the broader market. Biotechnology and solar pushed higher, but they showed signs of losing steam. Facebook’s (FB) purchase of WhatsApp for $19 billion dented the previously strong social media space, but in general internet funds continued to push higher.

Between the relative strength in the small cap index and the NASDAQ, plus subsector strength in internet, biotech and solar, the overall picture remains bullish. Nevertheless, another small pullback today or next week looks more likely than it did a few days ago.  The momentum pushing the leading sectors higher is slowing, which from a technical standpoint, could indicate some resistance over the short-term.

Finally, gold and silver miners remain among the sectors to watch in 2014. It looked as though we’d get a retrenchment this week when shares dipped on Wednesday, but they came roaring back on Thursday. A healthy pullback on the order of 10 percent would be nice to see (large miners are up about 25 percent so far and junior miners up 40 percent) for those looking to enter the sector.

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