State of the Stock Market Analysis for the Week Ending May 24, 2014 (Memorial Day Weekend Stock Market Analysis 5-24-14)

Memorial Day Weekend Stock Market Analysis

Whether you are off to the beaches, the mountains, or just staying home and barbecuing for the Memorial Day weekend, you can relax and celebrate (if you are a bull) this week’s solid performance in the stock market. We may have had a rough Tuesday decline following the contradictory comments from two different Fed Presidents, but once we saw the upward bounce on Wednesday, it was smooth sailing straight into Friday’s close. For the week, the Dow rose 0.7%, the Nasdaq gained 2.3% and the S&P 500 lifted by 1.2%. It was a great way to head into the Memorial Day Weekend, and it gives the market a positive vibe as we head toward summer.

The big positive of the week was seeing the S&P 500 notch an all-time high close above the 1,900 level. The S&P 500 traded as high as 1,901.26 on Friday, which was a sliver below its intraday, all-time high of 1,902.17 on May 13th. The close above 1,900 was a big accomplishment, though, and the key now is to see 1,900 turn into a technical and psychological level of support. The 1,900 level puts the S&P 500 about 6% away from 2,000, so you know that the bulls will be dreaming about the 2,000 level if we can continue to edge our way higher.

All this talk about new highs for the S&P 500 and the Dow is a bit deceiving, though, mainly because when we look at the year-to-date numbers for the major indices, they are actually somewhat tame for 2014. Year-to-date gains for the major indices are 0.5% for the Dow, 1.8% for the Nasdaq, and 3.6% for the S&P 500. The reason for these relatively tame year-to-date numbers is the fact that we finished a scorching 2013 at record highs, only to see a painful selloff throughout January and into the start of February. The stock market has clawed its way back since then with only a few brief downturns, and we are finally poised for higher highs as long as interest rates stay low, earnings improve and the economy keeps rebounding.

On the small-cap front, the Russell 2000 is actually down 2.2% for the year despite its 2.1% gain this past week. After dipping below its 200-day moving average several times in May, the Russell 2000 is back above its 200-day moving average of 1,106, and it is within striking distance of its 50-day moving average of 1,128 (it closed Friday at 1,126). The Russell 2000 had fallen about 10% from its early March high. That spooked quite a few bulls, who were concerned that a downward spiral in small caps was a sign of coming weakness in the broader market. The recent bounce in the Russell has allowed those same bulls to breathe a big sigh of relief.

So did Janet Yellen’s Yankee Stadium commencement speech to the graduates of NYU help rally the stock market this week? Well, she did not comment on Federal Reserve policy, interest rates, tapering or what the Fed plans to do with its $4.3 trillion balance sheet, and that was probably smart . Keeping the Fed’s huge challenges ahead “out of sight, out of mind” might be the wisest Fed policy of all. The debate within the Fed is whether to take action sooner or later to get the economy and the Fed back to a more “normal” setting, where stock and bond markets operate like “free markets” rather than sitting daily on pins and needles waiting for guidance, help,¬† and nurturing from a heavily involved Federal Reserve Bank.

Janet Yellen had recently expressed concerns about weakness in housing and lackluster employment levels, but it has been “so far, so good” for those sectors. We saw decent numbers this week in new and existing home sales, and we also saw weekly jobless claims come in at 326,000. The jobless claims number was a tad higher than what economists had expected, but the longer-term trend has been lower. Janet had also expressed concern over global military and economic conflicts, but everything from Ukraine and China to the Middle East and Europe was calm, cool and collected this week, which was another plus that might have helped the stock market.

As for fear, it is nowhere to be found. The Volatility Index (VIX) dipped to a 52-week low of 11.36. This makes some bulls nervous because they believe that too much complacency is a negative, and that history has shown repeatedly that an ultra-low VIX sometimes precedes economic “surprises” that can quickly drive the stock market lower. Most bulls are just happy to head into the weekend with the S&P 500 above 1,900, and they will worry about complacency next week rather than worry about it over the long weekend.

On tap for next week, we have the April durable goods report (0.7% decline is expected), the Case-Shiller year-year-over year home price change, and Consumer Confidence (83.5 expected versus last month’s 83.2). These reports should give us some additional insight as to the health of the U.S. economy. That said, have a wonderful and restful Memorial Day Weekend and remember to think about and be thankful for those brave soldiers, who died for this great country throughout our nation’s history. Again, have a great Memorial Day Weekend!

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