By Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) -- February job numbers and
continued fallout from harsh winter weather over much of the
country will have a big hand in deciding whether the recent
recovery in stocks has legs to run further.
The S&P 500 Index (SPX) finished the month up 4.3% to close
at a record high of 1,859.53. The index is up 0.6% gain on the
year. The Dow Jones Industrial Average (DJI) finished February 4%
higher, paring its loss on the year to 1.5%. The Nasdaq Composite
Index (RIXF) finished up 5% for the month and is currently up 3.2%
for the year.
Thursday will also mark the fifth anniversary of the current
bull market. Back on March 6, 2009, the S&P 500 closed at of
683.38, its lowest level since the financial crisis began. With
stocks poised to continue gains realized in 2013 following a
setback early in 2014 from an emerging market scare, many
strategists are not expecting a bullish break out but more reserved
gains with higher volatility.
"There seems to be a consistent trend of investor complacency,"
said Belski. "We have to be careful after the market has gone up so
much. The market desperately needs a rest and a reset."
A jump in short positions over the past two weeks as stocks have
rallied suggests that some investors are concerned the bull market
is looking long in the tooth as it approaches its fifth birthday
with so-called momentum stocks figuring prominently.
Even large-cap stocks are not immune. While the percent of
short-interest positions in large caps tends to be in the low
single-digit-range of outstanding shares, several companies saw
jumps of 20% or more in the number of shares shorted over the past
two weeks.
Heavyweights in the S&P 500 such as Apple Inc. (AAPL),
Microsoft Corp. (MSFT) , Comcast Corp. (CMCSA), Cisco Systems Inc.
(CSCO), AbbVie Inc.(ABBV), Honeywell Corp. (HON), Priceline.com
Inc. (PCLN), DuPont (DD), Dow Chemical Co. (DOW), Monsanto Co.
(MON), and Starbucks Corp. (SBUX) all saw a 20% or more jump in the
number of short-interest positions in the past two weeks alone,
according to FactSet data.
Exchange-traded funds following the S&P 500 and the Dow also
saw a big jump with the number of shorts in the SPDR S&P 500
ETF (SPY) and the SPDR Dow Jones Industrial Average ETF (DIA) both
growing more than 8% over the past two weeks to 29% and 19% of
outstanding shares, respectively.
An exercise in caution, as the market recovers from its
pullback, is one big reason BMO's Belski is holding onto his
S&P 500 target for 2014 of 1,900, just 2.2% shy of Friday's
close.
It all comes down to jobs and the weather
Markets finished higher Friday after fourth-quarter GDP growth
was scaled back as expected to 2.4% from its initial reading of
3.2%, with gains in the Chicago PMI, consumer sentiment, and
pending home sales offsetting tensions in Ukraine.
Ruling out a situation that spirals out of control in Ukraine,
the jobs number on Friday will be the biggest driver of where the
market heads, along with how adverse winter weather is disrupting
businesses and hiring.
"There's the expectation that jobs are going to get dinged by
the weather," said Dan Greenhaus, chief global strategist at
BTIG.
Economists surveyed by MarketWatch expect a slight rise in added
jobs to 140,000, with national unemployment rate unchanged at
6.6%.
Harsh winter weather and how it affect the first quarter is
likely going to remain with us for several more weeks, and might
add a level of volatility to markets, Greenhaus said. By
volatility, Greenhaus means where the CBOE Volatility Index (VIX)
is in the range of 15. In other words, where the VIX has averaged
over the past three years, excluding the big surges from 2010 and
2011.
"Jobs are key to the entire thing, a strong number would diffuse
the cold weather thing," Belski said.
Markets are already "priced to perfection" on the current rate
of Federal Reserve tapering. That should hold barring a misstep in
wording out of the Fed that could trigger a sell off, Belski said.
Investors, however, have also become a little more comfortable with
buying on the dips given that mini corrections are a part of most
bull markets, he added.
"It's pretty clear that investors are comfortable with the
notion of tapering but not with the longer-term vision of [Federal
Reserve Chairwoman Janet] Yellen," Belski said. "What if something
changes? What then? Everyone is giving them so much credit that
they can only misstep from here."
Other than that, the situation in the Ukraine could boil over,
introducing volatility. After the market close on Friday, President
Barack Obama warned Russia that any troop intervention in Ukraine
would have a destabilizing effect. "It's never good when you have
Russia flexing its muscles," Belski said.
Other data this week includes ISM manufacturing data on Monday,
ISM service and ADP unemployment on Wednesday, and factory orders
on Thursday.
Any one of those one-day data points has the potential to give
markets a boost, Greenhaus said., but for the most part, stock
levels are going to remain dictated by earnings, and how companies
maneuver the first quarter leading up to the next earnings
season.
With 97% of companies in the S&P 500 having reported this
season, fourth-quarter earnings growth stands at 8.5% with revenue
up 0.7%, according to John Butters, senior earnings analyst for
FactSet. Negative outlook for the first quarter is still running
high with 83% of companies providing an earnings forecast below the
Wall Street consensus, but that less than the 88% from this time in
the previous quarter.
Companies reporting quarterly earnings this week include
AutoZone Inc. (AZO), Costco Wholesale Corp. (COST), Kroeger Co.
(KR) , and Staples Inc. (SPLS)
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