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David Callaway
March 18, 2010, 5:12 a.m. EDT · Recommend (6) · Post:
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By David Callaway, MarketWatch
SAN FRANCISCO (MarketWatch) -- Maybe it was the Guinness.
The low-key, low-volume rally in U.S. stocks over the past week suddenly caught fire on Wednesday in a St. Patrick's Day rally that brought the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (INDU 10,771, +37.64, +0.35%) to its seventh-straight rising day, its best performance in seven months and its highest close since shortly after Lehman Brothers collapsed.
Stocks rose across the board as the Nasdaq Composite Index /quotes/comstock/10y!i:comp (COMP 2,390, +1.40, +0.06%) and the S&P 500 /quotes/comstock/21z!i1:in\x (SPX 1,165, -1.33, -0.11%) also surged, led by energy stocks, rising oil prices and a refreshingly giddy feeling among investors that low interest rates and rising corporate earnings could indeed yield another boom year for the market.
Anti-inflation sentiment obscures a nuanced economic picture, Thorold Barker argues on the News Hub panel.
That can only mean one thing: a correction is in the cards. The question is how long it will last.
The key is trading volume. It's been pitifully low ever since stocks hit their bear-market bottom levels last March, as the average investor either ignored the huge rally last year or else invested in emerging markets or bonds instead. And it's even lower this year than it was last year, tracking at about 4.7 billion shares a day on the NYSE, down from 5.5 billion last year, according to Miller Tabak & Co. About 5.1 billion shares changed hands Wednesday. See Market Snapshot.
A MarketWatch story last week shows how mutual fund investors barely bothered to climb back into stock funds as the Dow and S&P clawed back their financial crisis losses in 2009. The story held out the tantalizing nugget that historically it takes until the second year of a rally after a recession for investors to regain enough courage to jump back into the market. See story on fund investors still wary of stocks.
That would play well into the bullish drumbeat making its way across the globe right now, jibing with easing fears over Greek debt, low inflation reports and renewed commitments by the Federal Reserve Board to keep borrowing rates low for an extended period. On Wednesday, another bullish signal was activated when the Dow industrials joined the Dow Jones Transportation Average /quotes/comstock/10w!i:djt (DJT 4,396, +17.69, +0.40%) in closing above its previous high for the year-long rally set in January, triggering a popular scenario known as the Dow Theory. See MarketWatch First Take on Dow Theory.
The bearish scenario, meanwhile, which includes an oil shock caused by Iran, deficit problems in Europe and among the largest U.S. states, and the possibility that China is in a massive bubble, has been pushed to the curb of the parade route by the celebrating masses. Those issues haven't gone away; they're just conveniently overlooked right now.
Josh Lipton over at Minyanville pointed out in a piece for MarketWatch this week that some investors are dipping their toes back into equities through exchange-traded funds, taking advantage of the passive nature of those index vehicles instead of slapping their bets on specific stocks or active stock funds. See Minyanville guest commentary on MarketWatch.
He points out that as long as rates are at historic lows and the painful memories of the financial crisis remain fresh, investors will simply be unwilling to exit their bond funds or international stocks and climb back into the ring with U.S. blue-chip stocks.
So we are heading toward a day of reckoning; a point likely in the next month or so when the Federal Reserve will confirm what everybody already knows will happen -- that interest rates are going up.
While many investors fear that point, it could actually provide the crucial catalyst for the bull market as it will wipe out any lingering uncertainty about when rates will rise. Once they do start rising, trading volumes could begin to return, as well as volatility, as investors adjust their portfolios for a scenario they haven't seen since the summer of 2004 -- the beginning of a rate rising cycle.
Contrary to popular opinion, stocks can climb and have climbed during tightening cycles, as the Fed chases inflation brought on by a growing economy. Indeed, they rose during the last rate-rise cycle from June 2004 through mid-2006. It's just the tipping point of uncertainty that investors need to get through. That could come as soon as this summer, as I expect, or as late as the spring of next year, as others believe. Until then, stocks are hostage to being pushed around by large institutions on small-volume days. They may rise further, but the real rally will remain elusive.
As for the latest rally; take everything you can get, but notice that even the parent of Guinness, Diageo Plc /quotes/comstock/13*!deo/quotes/nls/deo (DEO 66.59, -0.38, -0.57%) , closed lower Wednesday -- on St. Patrick's Day no less. Talk about a tough crowd.
David Callaway is editor-in-chief of MarketWatch.
David Callaway is editor-in-chief of MarketWatch, responsible for the global news coverage of 100 journalists in 12 bureaus in the U.S., Europe and Asia. A financial journalist for more than 20 years, Callaway has worked for Bloomberg News, the Boston Herald, and assorted television and cable stations as a reporter, columnist and commentator.
Mary Schapiro had a lot of momentum going in her effort to reform the Securities and Exchange Commission -- until late Monday.
10:02 a.m. Today10:02 a.m. March 18, 2010 | Comments: 12
- StockTraderX2010 | 8:19 p.m. March 17, 2010
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