Equity Markets to Warm with the Weather

A resilient market in the face of bad news is a very bullish sign for investors. The market internals snapped back in rapid fashion last week as the best gains since early November pushed many of the short-term indicators back toward levels last hit prior to the Japanese earthquake. From purely a technical perspective, the SP500 regaining the 1300 level was important; next stop the recent highs at 1330. As corrections go, this one was as expected, short and shallow. What will be important now is the rally back toward the old highs: does it come on strong internals, does leadership change and does bullish sentiment snap back? With a very small data sample, the rally has been on very good market internals, with the net number of advancing to declining stocks just shy of its recent peak. Leadership has not changed, as energy, materials/industrial as well as small/mid cap stocks are leading the markets higher. Sentiment will have to wait a bit, as that data is released weekly. For now the markets are parroting Alfred E. Neuman – what, me worry?

The bond market continues to be the yin to the equity market’s yang. Yields moved higher on the week as investor’s put money back into the equity markets when it looked as though the world “issues” would not completely derail whatever nascent economic recovery we are experiencing her in the US. For now, the model is still positive, however any further backup in yields would be a signal that investors need to once again shorten overall risk profiles within the bond market. Commodity prices continue their moon-shot move, as the index rose over 2% on the week after falling over 3.5% in the prior two weeks.