Published June 8, 2009

WALL STREET INSIGHT

Investors turn cautious after 3-week bull run

Rising bond yields could spur outflow from stocks to safer assets: analysts

By ANDREW MARKS
NEW YORK CORRESPONDENT

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AFTER a strong start to the week, US stocks finished on a cautious note despite an unexpectedly strong unemployment report for the month of May that indicated the recession may be nearing its end even sooner than forecast.

'It is certainly worth noting that after a one per cent jump in Friday's pre-market, the broader market actually finished the day with a loss,' said Evan Riley, a money manager who handles a domestic large cap stock portfolio at Steele Asset Management.

'You do have to wonder whether it's just a case of buy the rumour and sell the news, or if we're seeing the first signs of slowing momentum in this bull market,' said Mr Riley.

Other market strategists, like Joe Liro at Stone & McCarthy Research Associates, said the lukewarm reaction to the jobs data could be an indicator that investors are starting to look for more than merely 'less bad' data, and 'might put their buying on hold until the numbers start showing that the decline is over instead of just slowing.

'The payrolls data was very positive in that we had only 345,000 layoffs, which is far less than the 520,000 consensus estimate, but after the bullishness in earlier sessions, there was enough in the report to keep the market from celebrating,' said Mr. Liro.

Indeed, the larger- than-expected jump in the unemployment rate, to 9.4 per cent instead of the 9.2 per cent that economists predicted, and an unexpected decline in average weekly hours, which reminded Wall Street that when the economy does recover it is unlikely to be a strong one, diluted some of the joy at the lower job losses.

Still, says Walter Murphy, a technical analyst and president of Walter Murphy Global Advisors, the bull market appears to be in place through the month of June.

'On June 1, the S&P 500 finally rallied through 944, a breach of the index's 200-day moving average, which locks in the decline from October 2007 to March 2009 as a complete pattern,' he said, noting it as a strong bullish signal on a technical trading basis.

'Higher highs are possible, even probable, in the weeks immediately ahead, but it could be a difficult summer,' once the end of the quarter 'window dressing' when investment managers buy into strong performers, draws to a close at the end of June, Mr Murphy said.

Dow Jones ended Friday with a 12.89 point, or 0.2 per cent advance at 8,763.13. It was a flat day for the Nasdaq Composite which ended at 1,849.42, and a loss of 2.37 points, or 0.3 per cent for the S&P 500, which closed at 940.09.

For the week, the Dow gained 3.1 per cent while the Nasdaq added 4.2 per cent and the S&P rose 2.3 per cent, It was the third straight week of gains for all three major market indexes.

The new week will start off with a major change in the world's most closely followed stock index, the Dow. GM and Citi are out as of today, replaced by Cisco and Travelers. But outcome for the coming week will be dependent on economic numbers and a series of upcoming Treasury auctions.

Some will be on the lookout for for more 'good' bad news, starting tomorrow with wholesale inventories and sales data for May.

Wednesday's highlight is the forward-looking Federal Reserve's Beige Book of economic conditions for June, which could be a market mover to the upside, traders said, along with the trade data for April, a rear-window report.

On Thursday, the May retail sales numbers loom large. With the market on high alert for further evidence of consumers' rising distaste for spending, a second straight month of declines in retail sales after two months of increases will likely dampen hopes of a quick economic recovery once the recession does finally end.

The University of Michigan's June reading of consumer sentiment is scheduled for release on Friday, when export and import prices for May will also be released

Stock market analysts have taken particular note of the rebound in bond yields the past two weeks, and there is a rising sense of concern on Wall Street that if yields were to back up much further than the current rates, it could spur investors to pull their recent gains out of the stock market and park them in safer bonds.

Several Treasury note auctions will be held over the next five sessions, although the three major ones will come in the middle of the week. Tomorrow will see a US$35 billion auction of three-year Treasury notes, Wednesday will have a US$19 billion auction of 10-year notes, and Thursday will see an US$11 billion 30-year bond auction.

With a rate of 3.89 per cent on the 10-year note, worse-than-expected results from the auctions will mean higher interest rates and pressure on the market.

'At the very least, the 10-year Treasury note yielding 4 per cent will capture a good share of all that sideline cash that has been waiting to come back into the stock market,' observed Joe Battipaglia, chief investment strategist at Stifel Niclaus. 'And as we appear to be approaching the latter stages of this short-term rally, that could put a ceiling on further stock market gains,' he said.

Commodity prices in general, and oil in particular, have also re-emerged as worries for investors. After closing last week at US$68.44 per barrel, a 3.2 per cent gain, Wall Street will be fretting that continued weakness in the Dollar could boost oil over US$70.