Stocks staged a sharp rally last week, with the major indexes rising nearly 3% in a holiday-shortened week. The market has rebounded almost 5% from the previous Thursday, when it hit 2016 lows, inspiring hope that at least a near-term bottom is within sight.

While investors welcomed the bullish turn, it was more style than substance. Given that buying was concentrated in the worst-performing stocks, last week’s rally seems more of a knee-jerk reaction to an oversold condition. Crude prices rose last week, and the lack of bad news from that sector was good news for stocks. In general, U.S. economic data was mixed but leaned positive, a badly needed boost to morale.

The Dow Jones Industrial Average tacked on 418 points or 2.6%, to 16,391.99 last week, while the Standard & Poor’s 500 index rose 53 to 1917.78. The Nasdaq finished with a 4% gain to 4504.43.

It was a “happy,” nearly 100-point jump in the S&P 500 over the past five trading days, says Jonathan Corpina, senior managing partner at Meridian Equity Partners. Nevertheless, “all the fear factors haven’t gone away,” and short covering helped. “It’s not as if the economic data or earnings-reports releases were particularly better last week.”

Bernie McGinn, CEO of McGinn Investment Management, concurs, adding that the rally had “more to do with bottom fishing than any major change in direction.” For months, the story’s been “energy, energy, energy, so when oil hangs around $30, as it did last week, that’s at least healthy.” Crude rose 0.7% to settle at $29.64 per barrel, snapping a two-week losing streak.

For the stock market to regain its equipoise, energy and financial stocks need to show strength, McGinn adds. Both sectors are down 14% over the past three months, the two worst sectors in the market. “Oil doesn’t need to get back to $75 per barrel, but even stabilization in the $30s” would take the edge off bearish attitudes, he says.

Meridian’s Corpina says Monday might be a good indicator for the action the rest of this week, as there’s little in the way of important economic indicators or earnings news to influence prices. The market will be on its own, he notes.

Looking ahead a few months, there are three factors that would help stocks the most, says Kevin Mahn, chief investment officer at Hennion & Walsh Asset Management. The market needs economic data to be good, but not so strong as to force the Federal Reserve to raise rates in March. The European Central Bank must continue to ease monetary policy, and a real deal on cutting the world’s supply of oil is necessary, he says. If things go the opposite way, however, then pressure on stocks will renew, Mahn adds.

(Source: Barrons Online)