After meandering around in a narrow range for the past two months just below its record high attained on April 2 at 1890.90, the S&P, along with two other measures of the market, exploded to the upside on Monday and as a result of this completely unexpected moonshot, the Dow Jones Industrial Average and the Dow Jones Transportation Index joined the S&P by closing at their best levels ever.
The reason that the large upside move was so unexpected was that both the S&P and the Nasdaq had closed lower during the prior three sessions for the first such losing streaks of this kind since early April, the Russell 2000 Index had undergone a 10 percent downside correction from its early March highs, and there was ostensibly no shortage of geopolitical troubles in eastern Ukraine.
On the other hand, Monday’s upside explosion once again proved the old adage that the stock market likes to climb the proverbial “wall of worry,” and this was certainly the case to start the week. As a result, the Dow put in its first four-day advance in more than a month and ended at its best level ever at 16,695. The Nasdaq, which had been overwhelmed by weakness in the formerly high-flying social media, internet and biotechnology stocks, had its best day in five months and the S&P put in its best performance since April 16.
If the market is going to continue to build on these dramatic gains, it will need support from those recently beaten-down social media, internet and biotechnology stocks, whose declines have been extremely dramatic to the tune of between 20 and 30 percent, which is the traditional definition of a bear market. But fortunately this carnage did not spill over into the entire universe of stocks, as the S&P fell by “only” 4.4 percent recently. In fact, there was much discussion of this divergence between “growth” and “value” stocks in the financial media over the weekend, with most supposedly “expert” opinions of the persuasion that since the Nasdaq and Russell 2000 Index of small stocks are more heavily populated than the Dow and the S&P, then it is inevitable that the troops are going to bring down the generals, so to speak. Monday’s upside explosion should go a long way to dispelling that notion for the time being.
In fact, we saw a classic example of this type of talk last week when one well-known hedge fund manager took these former high-flyers to task right at their lowest levels when he said that he had sold short a “Bubble Basket” of momentum stocks, which he probably did at higher prices and if this was not a case of talking one’s position, then I do not know what is. And interestingly enough, as these momentum stocks were gaining strength these past two days, the best performing group this year, namely the stodgy old utility sector that had advanced by 12 percent in 2014, began to sell off, which could mean that investors are now starting to sell high and buy low in the sense that they are cashing in on the winners this year and taking positions in the beaten-down ones in hope of some sort of more consistent upside performance from these former darlings whose wings have been so badly clipped lately and might once again be able to reward their owners from lower levels.
As I have mentioned before, the events in eastern Ukraine have become nothing more than a harmless sideshow as far as U.S. equities are concerned, as it is becoming more apparent that the sanctions imposed on Russia by the United States and now the E.U. can very quickly put that economy into more of a recession than it is currently in, and this will act as a restraint against President Putin becoming too adventurous militarily.
As an example of this, Russia said that it “respects” the results from two fraudulent referendums in eastern Ukraine held over the weekend for separatist independence at the same time that the formerly timid E.U. finally added a list of Russian companies for sanctions. The government in Kiev termed these elections a farce because they showed that in the Donetsk region, home of that pesky city Slovyansk, the vote was 90 percent in favor of the breakaway plan while in the Luhanks region, the vote was 96 percent in favor, and so it goes.
With events in the Ukraine finally being dismissed as a market moving factor here, until of course on the next down day this part of the world is thrown out as an ostensible “explanation” for why stocks were lower here, investors concentrated on the remarks of Fed Chair Janet Yellen in her two days of Congressional testimony last week to try to get a read on how the central bank views the latest economic developments. Her main point was that “a high degree of monetary accommodation remains warranted,” which means that the Fed is in no hurry to raise the federal funds rate from the current record low level of between zero and one-quarter percent that it has been at since the depths of the financial meltdown in December 2008.
She also said that the U.S. economy was still in need of lots of support given the “considerable slack” in the labor market while adding that the housing sector’s recent weakness also posed risks. Even as she took note of “appreciable” improvements in the jobs market, she said that a high rate of long-term unemployment and slow growth in worker pay suggested that there is plenty of room for further job gains.
Mrs. Yellen also said that she expected the economy to expand at a “somewhat” faster pace than last year as she described the “pause” in first-quarter G.D.P. growth of only 0.1 percent “as mostly reflecting transitory factors, including the effects of the unusually cold and snowy weather” and noted that “many recent indicators suggest that a rebound in spending and production is already underway.”
The only economic reports released this past week did show some modest improvement as she suggested, as weekly jobless claims declined by 26,000 down to 319,000 and March wholesale inventories rose by the most in five months, which was their ninth consecutive monthly gain, and this inventory buildup is in anticipation of increased demand from businesses.