In the months following the mid-March lows, major averages rallied sharply despite a raft of potential negative developments, including geopolitical concerns, lackluster economic data and expanding valuations.
Since late June, the stock market has been churning amid a rapid rise in bond yields and nagging concerns about George Bush's waning popularity and (more recently)
This week brought more upbeat developments, most notably the deaths of Saddam Hussein's sons. Additionally, the economic front saw better-than-expected reports on jobless claims, durable goods and new-home sales, while the index of leading economic indicators rose for a third-straight month.
Yet major averages were unable to rally on the good news, ending modestly higher for the week. On the other hand, stock proxies avoided any big setbacks and rallied at key technical junctures Tuesday and again on Friday, when the
Dow Jones Industrial Average
rose 1.89% to 9284.57, the
gained 1.74% to 998.68, and the
climbed 1.72% to 1730.70.
Friday's big gains, largely attributed to rumors of the pending capture of Hussein, secured positive weeks for the Dow, up 1%; the S&P, up 0.5%, and the
, up 1.3%.
Key themes this week were the bulls' inability to dramatically capitalize on the aforementioned positive geopolitical and macroeconomic developments. But that was offset by bears' inability to keep the downward pressure on stocks despite ongoing concerns about the economy's path and more details about accounting improprieties at Freddie Mac, as well as questions about
AOL Time Warner's
In many regards, the week was a wash.
"There was nothing spectacular" on either the earnings of economic fronts "to indicate a great third quarter nor anything bad enough to sink
stocks back into to the mire," said Scott Curtis, head of U.S. equity trading at Credit Lyonnais. "I think it was a market sensitive to earnings and economic indicators, and whichever way they pointed, that's the way the market traded."
Indeed, while overall earnings reports bested lowball estimates -- by an average of 6.2% according to Thomson First Call -- there were plenty of disappointments and firms' lowering guidance, including
, which fell 3% Friday in an otherwise upbeat session.
Also, juxtaposed with the aforementioned upbeat economic news were questions about the sustainability of improving trends in employment and durable goods orders, as well as more overt disappointments in existing-home sales and a third-consecutive week of declines in mortgage applications for new homes.
Those apparent cracks in the housing sector's armor were tied to further weakness in long-dated Treasury prices. For the week, the yield of the benchmark 10-year note rose another 19 basis points to 4.19% Friday after climbing above 4.20% earlier in the week, its highest level since early December.
Stocks Pass Test of Technicals
Recouping losses suffered Monday in the wake of a profit warning by
and disappointment over
results, major averages
rallied Tuesday after initially discounting reports of the deaths of Uday and Qusay Hussein.
Some not-as-bad-as-feared earnings by
and cautiously optimistic guidance from
aided the advance, which occurred after the S&P, Comp, Nasdaq 100 and Philadelphia Stock Exchange Semiconductor Index each held at key support levels and/or moving averages.
But there was little follow-through buying on Wednesday despite better-than-expected results from momentum favorites such as
Then Thursday, major averages surrendered early gains and ended sharply lower despite an unexpectedly large decline in jobless claims and better-than-expected results from firms such as
Thursday's setback left stock proxies in a technically precarious state heading into Friday's session, with the S&P hovering above its 50-day moving average at 979, the Comp about 11 points above support at 1690, the Dow threatening to break its rising trendline. Among other indices, the Nasdaq 100 was sitting just above support at 1252 and the SOX right at its 20-day moving average just below 375.
"On a technical basis, today is one of the more critical days we have seen since this rally began way back in March,"
contributor James De Porre opined prior to Friday's opening. "A breach
of those support levels on a closing basis would certainly embolden the bears and cause some technical selling pressure."
Instead, skeptics proved unable to sustain midmorning selling pressure and major averages soared in the afternoon, albeit on tepid volume, which does somewhat undermine the significance of the advance. At 1.4 billion shares on the Big Board, Friday's volume was in line with the week's average but down from Thursday's reversal; same in Nasdaq trading, where 1.7 billion shares changed hands.
In sum, Friday's rally shouldn't be construed as a signal of widespread demand for shares. But it did prevent major averages from suffering technical damage, which is a positive sign (for those long).
Looking ahead, most market participants believe major averages are likely to be
range-bound, possibly through August, with the S&P trading within a band of 970 to 1015.
"After a great run, we're probably going sideways to slightly down and consolidate gains," Curtis said.
However, the trader did express concerns about the weakening of the dollar this week -- which helped send gold futures up 5.4% this week to $362.80 per ounce -- and about the persistent weakness in the CBOE Volatility Index. The VIX closed below 20 on Friday for the first time since March 28, 2002, which was just before a big swoon -- something very few are currently contemplating.
I'll be back on WABC radio's Batchelor & Alexander show Friday evening, sometime around 9 p.m. PST/12 a.m. EDT. (OK, that's really Saturday morning for East Coasters). The show is nationally syndicated, so check wabcradio.com for local listings or Webcast options.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.