Week in Review: Market Analysis
Stocks gained ground Monday, buoyed by some mildly encouraging economic news and a big drop in oil prices. Trading levels remained near their lowest levels of the year. Very few leading stocks showed significant price movement. The major market indexes were nearly unchanged from where they were at their close on March 20. That day, stocks scored a follow-through day, a technical signal of big gains in higher volume that often confirms a strong new rally. In this case, however, the market remained in a holding pattern. The broad indexes flashed a distribution day in the prior week. That round of professional selling just a few days after the follow-through showed that the market was still on somewhat shaky ground.
The Chicago purchasing managers index delivered a better-than-expected result Monday, rising to 48.2 in March. That beat forecasts of 47.3 and topped last month's 44.5 result. Still, any figure below 50 indicates a contraction in Midwestern manufacturing activity. The market showed little reaction to a plan put forth by Treasury Secretary Henry Paulson, details of which circulated over the weekend. Paulson's proposal would give the Federal Reserve increased power to protect the stability of the entire financial system. It would also merge day-to-day supervision of banks into one agency, instead of the current five agencies.
The Fed has drawn recent criticism for some of its aggressive efforts to bail out embattled banks, including its big assist in JPMorgan Chase's buyout of teetering Bear Stearns. Elsewhere, commodities prices continued to fall. Crude oil slid $4.04 to $101.58 a barrel, continuing its recent pullback from highs above $110. Gold dropped $14.40, or 1.6%, at $916.20 an ounce, closing 10% off its recent summit. Prices for soybeans and other agricultural staples have also fallen off lately. Those drops have had mixed effects on stocks in commodities-related industries, however. While most highly rated gold and agricultural stocks have struggled, a number of oil stocks have held their own, or even flourished amid sinking crude prices.
On March 20, the Dow scored a follow-through day, jumping 2.2% in higher volume and confirming the market's newfound rally. But stocks didn't make much headway for the next week and a half, trading in meek volume for much of that time. On March 27, market volume picked up for a change, only to have the major indexes turn lower, netting a distribution day. Stocks vaulted higher Tuesday, fueled by a big rally in financials. The Nasdaq surged 3.7%. The S&P 500 jumped 3.6%, the NYSE composite 3.3% and the Dow industrials 3.2%. The small-cap S&P 600 ramped up 3.3%. Volume swelled across the board. It surged 25% on the Nasdaq and 17% on the NYSE vs. Monday.
Against that backdrop, Tuesday's action offered a breath of fresh air. Only one of the broad market indexes needs to follow through to confirm a new rally. Still, Tuesday netted follow-throughs for the Nasdaq, S&P 500 and NYSE composite. It also propelled the major indexes above resistance levels built up over the past few weeks. All of them leapt above their 50-day moving average lines, reaching their highest points since late February. The market's big price moves in higher volume pointed to increased conviction on the part of big-money, institutional investors, who showed an eagerness to buy stocks. Elsewhere, the Institute for Supply Management said its March index of national manufacturing activity rose to a reading of 48.6. Any figure below 50 points to contraction in the sector. Still, the number beat economists' views.
Other indicators also pointed to increased faith in equities. Bond prices fell, as the yield on the benchmark 10-year note bounced to 3.56% from 3.43% Monday. Metals prices melted. Gold sank below $900 an ounce. A number of foreign currencies also lost ground. When the stock market turns ugly, investors often escape the risk of the equities, latching onto other investment vehicles as safe havens. Tuesday read like a flight away from safety. With that said, a healthy rally requires active participation from leading stocks. On that front, Tuesday's results proved a little lacking. Aside from a few stocks, the session yielded few breakouts or dramatic new highs for top-rated stocks. That's a bit curious, given the huge price gains racked up by the broad market. The underperformance showed up in the IBD 100, which gained 3%. Still, a number of highly-rated stocks are nows setting up in bases, a good sign.
Financial stocks accounted for a good chunk of the broad market's gains Tuesday. Lehman Bros. jumped 6.70 to 44.34 in rapid volume. Late Monday, the investment bank unveiled plans to raise about $3 billion in capital through the sale of convertible preferred shares. Better-than-expected demand raised the proceeds to $4 billion. Analysts at Citi Investment Research and Deutsche Bank held their buy ratings on news of the offering. Lehman has been under pressure recently due to liquidity fears, such as those that plagued Bear Stearns. Swiss banking giant UBS jumped 4.21, or 15%, to 33.01 in nearly triple its typical turnover. The Swiss bank plans to raise $15.1 billion in new capital, helping to offset an expected first-quarter loss of $12.1 billion. A number of other major banks took off after the Lehman and UBS announcements. Investment banks ranked as the third-biggest gainer of the day among the 197 industry groups tracked by IBD.
Stocks notched mixed results Wednesday, trading quietly a day after their big rally. The major indexes started the session higher, but the market faded as the day went on, leaving the nearly all the indexes in the red by the closing bell. The NYSE composite hung on for a 0.2% advance. Volume eased across the board. When the market starts a session higher, only to reverse and turn gains into losses, that's generally a negative sign. But all things considered, Wednesday's reversal didn't look bad. For one thing, the session's lighter volume suggested that big-money investors weren't eager to dump shares. Context matters, too. On Tuesday, the Nasdaq's 3.7% led a powerful day of gains for the broad market indexes. You can't rightly expect a big rally every day. So if stocks are going to pull back, a quiet decline counts as healthy behavior. Losses as small as Wednesday's point to a market that's reluctant to relinquish its gains.
Early in Wednesday's session, Federal Reserve Chairman Ben Bernanke said the U.S. is in danger of falling into a recession, with growth likely to contract in the first half of 2008. Speaking before the Joint Economic Committee of Congress, Bernanke said the economy is still "slightly growing at the moment." But he added that he expects a continued rise in unemployment, and that the economic outlook has worsened since the Fed's last forecast in January. The market seemed mostly unfazed by those comments, as stocks didn't show any big swings or surges in trading volume. Indeed, Fed officials, economic analysts and other pundits have speculated about a possible recession since last summer, with louder warnings ringing out for the past several months.