Profit-taking and market consolidation expected after the strong two-week run in the Dow Jones Industrial Average and the S&P 500 indexes occurred as expected last week, with little new news to propel markets higher. After posting back-to-back triple digit weekly gains, the DJIA took a break last week as the index managed to gain only 35 points (+0.3%) and closed at 10607. The highlight of the week occurred on Tuesday when the Dow scored a new recovery high as it closed at 10632.35, the highest level it has been at since 06/20/01. The NASDAQ, which was above its 200-day moving average on Monday, failed to hold and was under pressure for the remainder of the week. For the week, the index lost 61 points (-3.16%) and closed at 1868.
Breadth was positive last week as the NYSE Advance/Decline line gained 785 units while the number of NYSE stocks making new 52-week highs exceeded those making new lows on all five trading days. The number of NYSE new highs continues to be in triple digits. This reflects the broadness of the current rally and could be considered a healthy base from which to advance. The number of NYSE stocks above their 200-day average expanded to 61.1% from 58.8%, as did those above their 50-day, rising to 64.0% from 62.3%. Money continued to pour into US equity mutual funds. For the period ending 03/13/02 inflows totaled $3.6 billion compared to inflows of $3.4 billion the previous week.
We believe our models continue to be well positioned for today’s market, given the evidence of a strengthening economy and the continued need for risk management. Our models currently favor blue-chip equities, as well as small/mid-cap value types of companies. We remain cautious on aggressive growth areas, and generally carry a 0-50% weighting in this market segment. While we are eager to invest fully in aggressive growth equities, we believe further work must be done in the market to lay a solid foundation upon which to build.
Recently released data suggest that the “slow but steady” economic recovery is underway, providing a solid foundation for further market advances.
The University of Michigan’s preliminary index of consumer sentiment rebounded in March after falling for the first time in five months in February. March’s preliminary reading of 95.0 is higher than Wall Street’s expectation of 93.0 and the highest since December 2000. The index of expectations also rose in March, to 92.3 from 87.2 in February.
The PPI for finished goods rose 0.2% in February, in line with Wall Street expectations. Core prices (finished goods less food and energy) were unchanged, versus a 0.1% increase expected by Wall Street. Over the past year, the PPI for finished goods has fallen 2.7%, while the core index has increased 0.5%.
Industrial production increased 0.4% in February, versus a 0.2% increase expected by Wall Street. Moreover, the previously reported 0.1% decline in January was revised to a 0.2% increase. Over the past three months, industrial production has risen 1.2% (annualized), but it is still down 4.1% over the past year.
Should the data (and the market sentiment) continue to forecast economic stability and renewed growth, we believe we will be well positioned to take advantage of further market advances. However, we continue to be ever vigilant for signs of a trend reversal and will continue to manage your hard-earned assets with a focus on market-like returns and simultaneous risk management.