The stock market spun its wheels last week, with prices ending little changed for many big issues. Small-caps, however, dropped 3%, one of a few technical market divergences that investors should watch.
U.S. Federal Reserve Chairman Ben Bernanke’s congressional testimony Tuesday dispensed with investor hopes for more monetary stimulus in the near term. Gold got the message and plummeted 5% Wednesday before recovering a bit to $1,712.60 per ounce by Friday.
The Dow Jones Industrial Average flirted with the 13,000 level, closing above it on Thursday, the first time that’s happened since May 2008. But the Dow couldn’t hold on to that round number and ended Friday at 12977.57, five points off the previous week’s close. The Nasdaq Composite gained 0.42% to 2976.19. The one sour note came from the small-cap Russell 2000 index, which fell 3% to 802.42.
The drop in small-caps in the past 30 days or so, as well as a decline in the past month in the Dow Jones Transportation Average, are divergences from the broad market that investors shouldn’t ignore. There is a complacency and lethargy to the market that suggests a quick and humbling 3% to 5% pullback could be in the offing, one trader says.
The economic news out last week was slightly less positive than investors have been accustomed to. Consumer-confidence figures rose sharply, but some manufacturing indicators fell. Despite a recent 20% rise in gasoline prices, a “remarkable” data point came from car sales, which reached their highest levels in February in nearly four years, says David Kelly, chief market strategist for JPMorgan Asset Management. The rise was equivalent to an annual sales rate of 14.7 million cars.
“It reflects both pent-up demand [from the past couple of years] and a rising tide of consumer confidence,” he says. Given the importance of companies such as General Motors (ticker: GM) and Ford Motor (F) to the U.S., rising car sales are good for the whole economy. A year of 15 million units in car sales is just about the 20-year average for the U.S.
The price of energy is probably the greatest near-term risk that market faces, says James McDonald, chief investment strategist at Northern Trust. Only if economic indicators continue to be strong will investors be comfortable with higher oil prices, he says.
Investors’ worries have shifted from topic to topic in the past 12 months, just as a baton passes hands in a race. The European sovereign-debt situation was enemy No. 1 last spring. The worry next turned to whether U.S. economic growth would turn flaccid. Now it has morphed into concerns about rising oil prices, what with crude above $100 per barrel.
One thing the market won’t like is a potential military strike by Israel against Iran. Look for this talk to heat up in the spring (Source: Barrons Online).