Summary
Stocks were supposed to advance last week, and advance they certainly did! Now what?
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Everything last week pointed to the strong probability of higher stock prices, which is what ensued. From the 1/31 missive ("Stock-Market Update"):
"We begin this week with the afterglow of a pretty decent Iraqi election...Then comes the State of the Union address on Wednesday night. Be assured you will hear nothing too unsettling coming from the President. Then there is the stock market itself.
"Notwithstanding what it does today [1/31/], it has had a poor January. Nevertheless, the bullish camp is now working overtime to squelch the idea that January really sets the tone for the entire year. In addition, the market enters this week more oversold than overbought, so the technical backdrop is favorable...Generally, stocks have more going for them than against them over the very short run. Thus, a rally this week conforms far more to expectations than weakness would."
Sometime tomorrow, I'll have more on the idea that stock prices are facing an important moment of truth, but in this regard, the following table conveys a key message.
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SELECTED STOCK-MARKET RETURNS
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02/04 2004
2005 High 02/05 Vs.
Close Close /Date 2004 High
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NYSE Comp. 7217 7254 12/30 -0.5%
S&P 500 1203 1214 12/30 -0.9%
Wilsh. 5000 11866 11988 12/30 -1.0%
DJIA 10716 10855 12/28 -1.3%
Value Line 397 405 12/30 -2.0%
Russ. 2000 637 655 12/28 -2.7%
NASDAQ 100 1534 1625 12/29 -5.6%
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Average -2.0%
Median -1.3%
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And with the Treasury conducting its $51-billion February refunding operation this week, interest rates are at a critical juncture, too. Dealers generally like to establish a sizable short position going into the refunding auctions, but the bond market's strong performance recently likely has disrupted this strategy.
So another interesting week is on tap for the markets. We will have an additional look at it tomorrow.
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