Published June 15, 2009

WALL STREET INSIGHT

US stocks find a floor but run into a wall

By ANDREW MARKS
NEW YORK CORRESPONDENT

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THE Dow Jones Industrial Average is in positive territory for the first time this year, but opinion is split on whether the blue-chip index will be able to build on its gains much beyond the next week or two.

'I see some technical drivers and the end of the quarter window-dressing giving stocks a positive boost heading into what will be a pretty volatile week of trading, especially by the last couple of days, with quadruple witching on Friday,' said John O'Donoghue, head equities trader at SG Cowen, referring to the quadruple expiration of futures and options, which often leads to big swings in the market.

Big swings this week are unlikely in a market that hasn't seen a move of as much as one per cent for the last ten trading days.

'I have the sense that the market's forward momentum has really slowed after a rally that has already gone on now for three-and-a-half months, and has brought us back from the brink. We're about to hit the traditional summer doldrum months, and then there's a couple of big obstacles in the way of equities - bond yields and oil prices - that are only getting bigger and more difficult to overcome,' Mr O'Donoghue said.

Indeed, over the past two weeks, the two biggest topics of conversation among Wall Street traders have been the steady climb in the 10-year Treasury note to 4 per cent, and the weakening dollar and the corresponding moves in commodities.

'The issue of the chances of having an economic recovery this year has been pushed a little into the background the last couple of weeks by worries over bond yields and commodity prices - which is a remarkable thing unto itself, considering that we are still a long ways from being able to definitively say a recovery is going to happen by year-end,' noted Marc Pado, chief investment strategist at Cantor Fitzgerald.

'In a sense, it's a positive that investors are focusing their attention elsewhere, because it's a good indicator to me that we have established a pretty solid floor at this level for equities. I think the chances of a serious dip are becoming pretty small,' he said.

At the same time, money managers like Jim Earle, a managing director at Lancer Capital Advisors, observed that the weakening appetite for government bonds that investors showed in last week's Treasury auctions, combined with the rise in oil prices, could very well put a crimp on the nascent economic recovery that has underpinned the rally.

'You can't take the economy for granted at this point. The signs of recovery are still fragile ones, and oil over US$70 per barrel is a threat to economic growth. At the same time, the 10-year note at 4 per cent is a threat to the equity market,' he said.

The price of a barrel of crude rose 5.3 per cent in the past week, ending the week at US$72.04. The 10-year Treasury note slid last Friday to a yield of 3.78 per cent, after hitting 4 per cent the day before.

Last Friday, the decline in bond yields helped the Dow eke out a 28-point, 0.3 per cent advance, to 8,799. The S&P 500 Index edged up one point, or 0.14 per cent, to 946, while the Nasdaq Composite Index did the opposite, slipping three points, or 0.19 per cent, to a close of 1,858.

For the week, the Dow added 0.4 per cent, while the S&P 500 added 0.65 per cent. The Nasdaq rose 0.5 per cent for the week.

This week is a busy but not momentous one for economic data, leaving the stage to the G-8 meeting in Italy where finance ministers will gather on Friday, and oil prices, which investors will be keeping an eye on as crude approaches the US$75 per barrel mark.

On today's data docket is a manufacturing survey for the New York region, followed by the housing index from the National Association of Home Builders.

Tomorrow features May producer prices, housing starts and industrial production numbers, while Wednesday's highlight is the May consumer-price index.

On Thursday, investors will be hoping for another dip in weekly jobless claims following last week's encouraging numbers. There's also another regional manufacturing survey, this one from the Philadelphia region, as well as the scheduled release of the latest read on leading economic indicators.