Despite oil price volatility and tensions in the eurozone, markets concluded their second straight winning week. In fact, European equities hit seven-year highs. Stocks rallied after a Ukrainian ceasefire was brokered by Germany and France. Markets also enjoyed surprise stimulus by Sweden's central bank, better-than-expected eurozone GDP growth, solid U.S. earnings and M&A activity.
Since July, equities had remained range bound. Trapped in the kind of sideways trading pattern that is a fixture in bull markets. Bears and bulls struggle to gain the upper hand. A similar trend occurred for much of 2012, as the S&P 500 remained in the 1300 to 1400 range for most of the year before breaking through and soaring higher. As of last week, stocks broke through their ceiling. A move which likely portends the next leg higher.
You'd think bulls would have the momentum. Greece is sorting itself out. The interest rate outlook is clarifying. Oil prices are firming and bonds are pulling in. Such a critical mass of ammunition should help bulls find a way to break through resistance. But, there could be more churning first. Because when markets are in a range the most likely scenario is more range-bound action that frustrates both bulls and bears.
How about a couple of market signals that may reveal the market's next move?
An S&P 500 close above 2094 would squeeze bears and lead to panic buying followed by a good old fashioned melt-up. A QQQ close below 99.50 would induce bulls into panic selling and a quick five-percent-or-more move lower. And as the S&P finished last week at 2,097, we could soon see higher highs.
Last week's Investor Intelligence Survey revealed a more bullish sentiment. Shares of bulls increased to 52.5 percent, up from 49 percent the week before. Bears fell to 15.2 percent. Down from 16.3 percent. Higher risk appetites were apparent by the inflows to high-yield bond funds, which totaled nearly $9 billion these last three weeks. The largest on record.
Recent jobs reports catalyzed further discussion over the Fed's determination to raise interest rates. Jon Hilsenrath, The Wall Street Journal's Fed reporter, wrote that the report increases the likelihood that the Fed removes "patient" language from its March statement, which might allow for tightening in June. He further noted that there is debate within the Fed on whether the natural rate of unemployment is lower than previously believed.
These prognostications are tales packed with sound and fury. Yet, for the time being, signifying nothing. For if one looks at the global economic mosaic, one is hardly emboldened. A slow recovery in China. A struggling Europe. Japan has reentered recession. A lack of U.S. inflation. And recently mixed U.S. economic data. It seems the Fed has ample opportunity to push its day of reckoning back. So avoiding the possibility of undoing six years of economic engineering.
Fact is, Citigroup's U.S. economic surprise index is flashing red. The index measures where economic data is falling against analyst expectations. Better-than-expected data pushes the index higher. Weaker-than-expected results send it lower. After peaking late last year, the index has dropped to early 2014 lows as a variety of data points have missed expectations.
Further, the Economic Cycle Research Institute, which has a forward looking weekly index that has shown an uncanny ability to peer around economic corners, has seen that index fall to three-year lows. Levels that, aside from the current economic expansion, have only been seen seven other times since the 1970s. Six of which marked the beginning of recessions.
Stocks and jobs are up. This could be buoying consumer spirits. Leading to higher spending. But the data suggests that something is ailing the U.S. economy. Could it be the capital expenditures drop in the energy sector? Concerns over difficult foreign headlines? Whatever the catalyst, we'll be watching closely in the weeks to come.
