Week End Perspective: April 18, 2014

Stocks seemed to have found their footing, with the major indexes bouncing in a holiday shortened week. The S&P 500 Index gained 2.7 percent on the week and more importantly, the Nasdaq rallied 2.4 percent. Energy also proved to be a big winner as oil prices moved higher, followed by stocks in the sector.

The Dow Jones Industrial Average is also poised for a bullish breakout. We have talked about how the Dow has not made a new high since late 2013, but it has outperformed the other indexes during the recent slump. On Thursday, the Dow closed less than 200 points away from its all-time closing high. A move of a little over 1 percent will push it into new high territory.

This puts both energy and the DJIA on the verge of simultaneous bullish breakouts. Furthermore, the Dow is not an energy intensive index benefiting from energy’s advance. Instead, it appears that economic activity is picking up and energy prices are moving with it. The events in Ukraine are often cited as the cause for rising oil prices, but there’s reason to be cautiously optimistic that the rise is in fact due to economic strength.

We will know in the coming weeks whether this is the case as economic data from Q2 is released.  Janet Yellen and the Fed certainly believe the weather was to blame for weakness in Q1. The Fed’s Beige book, which contains information on the current condition of the economy, mentioned the weather quite often. Areas of the country where economic data remained sluggish did indeed see colder weather. We remain skeptical about the impact of the weather on GDP, but what’s important now is Q2. If there’s a pickup in activity, investor sentiment will turn around in a hurry.

One sign of increased investor optimism appeared as utilities dropped 1 percent on Thursday. Utilities are defensive, but they rallied along with stocks earlier in the week. The slip on Thursday may be a sign that defensive investors are leaving for riskier sectors. At this point, the dip might only represent a normal pullback. Utilities enjoyed a strong run this year and a small retreat does not signal a change in trend. We still favor utilities as a defensive position and we will monitor this sector closely.

Earnings reports and guidance were mixed this week. Hits were delivered by Coca-Cola (KO), Johnson & Johnson (JNJ) and General Electric (GE). Misses were IBM, Google (GOOG) and Unitedhealth Group (UNH). This continues the pattern we have seen previously of investors rewarding good reports or guidance and punishing earnings misses or weak guidance. It’s a positive sign for the market because it means sentiment is not overall bearish. The winners would struggle to rally in a weak market, but they saw considerable bounces this week. Next week it will be important to see these gains are held, but overall this was a very good week for the markets.

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