The bulls did their thing again this week, overcoming any concerns about the Fed tapering its asset purchases soon to drive a 2.0% gain in the S&P 500. This week's gain leaves the S&P 500 up 4.3% for the month in what has been a clear decoupling from the "sell in May and go away" couplet.
The week started on a bit of a nervous -- and flat -- note after a weekend article in the Wall Street Journal indicated the Fed has mapped out a strategy for tapering its asset purchases. That view lost its punch, however, with the added indication that the timing of instituting that plan is still uncertain. In brief, the article didn't really tell the market anything it didn't already presume based on prior views communicated in the FOMC Minutes.
Still, the headline itself was enough to cause a pause in the buying action and to overshadow what was a better-than-expected retail sales report for April.
When Tuesday rolled around, buyers were back in action, emboldened by the bullish view of noted hedge fund manager David Tepper of Appaloosa Management. In a CNBC interview before the market opened, Mr. Tepper, who correctly called the market's direction in September 2010, said he is still definitely bullish on the market since all of the evidence in front of him -- an improving economy, attractive valuation, and central bank support -- tells him to be. Mr. Tepper added that the market should not be overly concerned about the Fed tapering and he suggested short sellers will need a shovel to dig out of their graves if the Fed allows the market to party like it's late-1999 again by not tapering its asset purchases.
Market participants took Mr. Tepper's view and rolled with it, rolling over short sellers in the process, on the way to a 1.0% gain in the S&P 500 that day. The influence of that view persisted on Wednesday, as the market padded its gains in the face of a disappointing outlook from Deere & Co. (DE) and weak readings for industrial production in April and the Empire Manufacturing report for May.
Thursday saw a turn in the action, but not until late in the day when the major averages surrendered modest gains that had been posted despite more disappointing economic news that took the form of the weekly initial claims, housing starts, and Philadelphia Fed Index reports.
That battery of reports, while disappointing, joined with a soft CPI report for April to suggest the Fed still has reason to stay on its current policy course. That view facilitated a familiar buy-the-dip trade. However, the major averages retreated on some late profit taking that coincided with a report that San Francisco Fed President Williams said the Fed could perhaps taper its purchases this summer, and maybe even end its program late in the year. That view was pretty much identical to the view he shared in a speech on April 3, so it was a bit of a reach to say those remarks spooked the market. In our estimation, they simply provided a convenient excuse to take some money off the table.
In the same vein, dovish remarks on Friday from Minneapolis Fed President Kocherlakota, who said the FOMC has not yet lowered real interest rate sufficiently, seemed to factor into an afternoon rally that saw the S&P 500 log a tidy 1.0% gain in the final session of the week. Actually, though, the market didn't breakout on Friday until 20 minutes after Mr. Kocherlakota's remarks hit the wires. His views didn't hurt matters, but they weren't the catalyst for the late breakout.
Our sense of things is that the afternoon move on Friday was more of the same with short sellers capitulating in the face of the stock market's resilience to selling interest and bullish participants being further emboldened by the continued leadership of the sectors one would expect to see in a cyclical upturn: financials, energy, industrials, materials, and technology.
The week concluded with the Dow, S&P 500, Russell 2000, S&P 400 Midcap Index, and Dow Jones Transportation Average all achieving new record highs.
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