Stock Market Update: The Prospects For More Gains

Willie Delwiche

The market U.S. stock market indices moved sharply higher last week following strong performances in overseas markets and indications that the U.S. economy is not headed for recession.

The powerful three-day stock market rally was the best performance in more than three months and carried the S&P 500 Index and the Dow Jones Industrial Average 5.00% above the recent lows.

The financial markets also benefited from indications by central bankers that more liquidity will be added. The sustainability of the recovery will be evidenced by the ability of the popular stock market indices to break out above key price resistance levels, which is 1950 to 1990 using the S&P 500.

If the current stock market rally is to have legs we would expect to see investors move away from defensive sectors and into more aggressive areas of the market. This would require improved performance by the energy, materials and financial sectors. If last week’s rally is another false start, however, notice of this would become evident by stocks falling below support which is considered to be 1860 using the S&P 500 Index.

Near term, we anticipate that last week’s strong performance will lead to further gains as we move into the final leg of the first quarter. The downside momentum that has anchored stocks since early January has been broken.

us financial markets summary economy february 23

What We’re Watching With This Latest Stock Market Rally Attempt

Missing, however, is evidence of a surge in upside momentum as last week failed to provide a single session with upside volume exceeding downside volume by a ratio of 10-to-1 or more. Given resistance is just ahead, it will be important that upside volume begin to rise soon. Although investor sentiment has moved away from the extreme pessimism readings found two weeks ago, there remains sufficient skepticism to support further upside progress. Reports from Investors Intelligence and the American Assocation of Individual Investors continue to show more bears than bulls. The most recent data from the National Association of Active Investment Managers and the 33% drop in the CBOE Volatility Index (VIX) argues that the excessive pessimism found earlier in the month is receding.

The argument for a long-term sustained stock market advance relies on earnings growth returning to levels strong enough to overcome the high valuation levels that have handicapped the market since the fourth quarter of 2014. We are monitoring leading indicators that would suggest the economy is gaining steam including a narrowing of credit spreads and improving trends in commodity prices. Important is the fact that the last six recessions in the U.S. were preceded by rising oil prices. There has never been a recession that has followed declining oil prices. The combination of rising wages and declining energy costs has significantly expanded consumer discretionary income. This could eventually lead to improving economic conditions and stronger earnings growth.

investor sentiment and stock market volatility indicators february 22

stock market sectors relative strength week for february 22

us core inflation rate chart 2015-2016

Thanks for reading.


Twitter:  @WillieDelwiche

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.