A handful of economic data helped the stock market today (Tuesday) resume a robust rally – but are we due for a pullback?
The Dow Jones Industrial Average closed up 111.90 points, or 0.77%, at 14,559.65. The Standard & Poor’s 500 Index jumped 12.08 points, or 0.78%, to 1,563.77 – just a couple points from its record high. The Nasdaq climbed 17.18 points, or 0.53%, to close at 3,252.48.
The broad-based stock market rally followed a sell-off Monday, which took the Dow down 64.28 points, or 0.4%, to close at 14,447.75. The S&P and Nasdaq both fell 0.3% as investors mulled a bailout deal for Cyprus.
But the old adage that investors have a very short memory rang true Tuesday. Shrugging off yesterday’s woes, market participants instead focused on encouraging U.S. economic data.
Buoying stocks Tuesday was a Commerce Department report that showed durable goods orders surged 5.7% in February. That handily beat economists’ expectations of a 0.5% rise and reversed January’s 3.8% plunge.
A separate report Tuesday revealed single-family home prices began 2013 with the biggest annual increase in six-and-a-half years. The S&P/Case Shiller composite index report is a further sign of a recovery in the housing market.
But the big question is if the rally will last.
Why a Stock Market Pullback Could be on the Way
While markets breathed a sigh of relief on news that a deal had been reached regarding the Cypriot bailout, the banking crisis in the island nation is far from over.
Cyprus agreed to consolidate its two largest banks and inflict heavy losses on uninsured depositors. In exchange, Cyprus gets 10 billion euros ($13 billion) in international loans to prevent the total collapse of the island nation’s banking system.
The eleventh-hour deal still requires Cyprus to raise 5.8 billion euros ($7.5 billion) to qualify for the loan. The plan calls for Cyprus to tax bank accounts that exceed the nation’s insurance limit of 100,000 euros ($128,000).
The nation’s largest bank will also be whittled down. Popular Bank will become a “bad bank,” holding large deposit sums where savers could potentially lose everything.
Many question if the hastily put together deal will work. The outcome will almost certainly result in a much more somber sovereign debt crisis.
The risks and diminished trust in banks will be widespread. While cross-border banking waned after the 2008 financial meltdown, it’s still big business. Fragile economies in Italy, Spain and Greece have again been put under the microscope.
“It greatly increases the chances of bank runs in other EU countries; PIIGS [Portugal, Ireland, Italy, Greece, and Spain] banking systems are now very unstable,” said Money Morning Global Investing Strategist Martin Hutchinson. “This may have postponed an EU meltdown, but at the same time has made it more likely.”
He warned savers everywhere should be concerned.
S&P’s Failure to Hit a New High
The fact that the S&P hasn’t yet hit a new record is another concern among investors.
The Dow danced passed its record high of 14,165 on March 5. The benchmark went on to log 10 consecutive new highs before taking a break.
The S&P, a broader measure of the markets, has been in striking distance of its October 2007 high of 1,565.15 for several weeks. The index is so close, yet can’t march beyond record territory.
A fresh record for the S&P would be important because it would confirm the four-year-old bull market still has legs. However, those legs may be getting tired.
First-quarter growth this year is expected to slip to a 1.5% annual rate.
In addition, companies’ negative quarterly pre-announcements outweigh positive ones.
Data from Thomson Reuters reveals 102 companies to date have warned investors to brace for weaker-than-expected earnings going forward. That compares to just 23 that have raised projections.
Barron’s notes that the 4.4 negative-to-positive ratio is the worst since 2001.
With stocks up nearly 10% this year, calls for a correction have surfaced. Safe haven gold and silver are looking increasingly attractive.
Money Morning Capital Wave Strategist Shah Gilani has another investment that will help investors if a pullback occurs. He shared it with our Private Briefing investment service subscribers in a special report, “The Seven Investments You Have to Make in 2013.” Here’s how you can get your own copy of our investor report, and learn more about Gilani’s stock market crash “insurance.”
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