State of the Stock Market Analysis for the Week Ending May 10, 2014 (Strengthening Economy 5-10-14)
Dow reached all time high

Stocks eked out a win on Friday as the Dow reached an all time high, and that had the bullish camp smiling. The S&P 500 is within 19 points of its all-time high, but the Nasdaq has its work cut out for it. The Nasdaq would have a long way to go to hit its March of 2000 all-time high of 5,123, but it is close to its 14-year high of 4,371. Overall, the major indices are in a great position for higher highs, which will likely happen as long as earnings and economic numbers cooperate.

One concern, however, is the trailing off in small cap stocks, as is evident with the roughly 10% decline in the Russell 2000. There is a growing chorus of market strategists warning that historically, a fall in small cap stocks is a prelude to a broader market decline. In addition, the recent slide in the big-cap technology and social network names is also a potential warning sign. When the “leaders” of a long bull market run start to fall apart, it could be a sign (like the fall in the Russell) that something might be amiss.

It turned out to be a mixed week for the major indices as the Dow rose 0.4%, while the Nasdaq was off 1.3% and the S&P 500 was down 0.1%. We are clearly lacking direction right now, so the key for the rest of the month is for the stock market to get some conviction, whether it be up or down. The big plus right now is that the broader market is consolidating at such lofty levels. We are having a so-so year so far, but by hanging tough at these high levels, it is confirming that 2013’s big gains were legitimate.

It was great to see Janet Yellen get the “seal of approval,” as stocks rallied big during her testimony to the Congressional Finance Committee this week. Investors seem comfortable with her, and they seemed even more comfortable when she said the Fed would keep interest rates low and money flowing for a long, long time. The Fed’s bond-buying may eventually end (one Fed President said it would end in October), but the main take-away is that Janet all but promised to not raise rates anytime soon.

Janet expressed concern about global tensions (like Ukraine), a weakening housing market, and a flimsy employment picture. Why would a Fed Chief express so many worries publicly? Well, again, she wanted to make it very clear that the Fed has its eye on the ball, but her comments also prevent investors from getting over-confident. There was a lot of over-confidence under Greenspan in 1998-1999, and that investor confidence caused a gigantic slug of money to chase stocks until they crashed in March of 2000.

Maybe that was what Janet was doing. Maybe she was sounding negative to keep the stock market calm and cool and to keep a runaway bull market from occurring. Who knows, but the slow and steady rise in stocks, accompanied by some 10% corrections here and there are healthy for an aging, five year-old bull market. We will keep a close watch on the Russell and the recent “leaders,” but for the time-being all looks good for investors.

We have a lot of economic news out next week with everything from retail sales, PPI, CPI, and industrial production to housing starts, the Philly Fed and consumer sentiment. That is a big tray of economic news so maybe the market will be able to decide which way to roll. Bulls are rooting for an upside breakout in the S&P 500, so stay tuned. That said, the Gorilla wishes each and all a fun, restful, and relaxing weekend.

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