What a Week: Up Not Always Good

The S&P and Nasdaq hit four-year highs but bond yields, crude and odds for more rate hikes also rise.
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Wine has officially topped beer as the favorite alcoholic beverage of Americans for the first time since Gallup started its survey on the matter in 1992. It could be that soaring home equities are allowing more people to taste the finer things of life.

Maybe wine-induced highs also help consumers forget that crude oil is again above $60 after rising 67 cents to $60.57 a barrel on Friday. High energy prices seem to be fairly well tolerated by Wall Street, where major stock indices managed to continue their three-month old rally.

For the week, the

S&P 500


advanced 0.1% and the

Nasdaq Composite


rose 0.2%. Last week, the S&P gained 0.5% and the Nasdaq 1%. The

Dow Jones Industrial Average


, meanwhile, fell 0.1% this week after rising 0.1% the previous week.

New four-year highs were made this week by both the S&P 500 and the

Nasdaq Composite

. But the week's gains weren't inspiring for the second week in a row, even if second-quarter earnings continue pouring through at better-than-expected levels, including this week from big-cap companies such as

Exxon Mobil

(XOM) - Get Report


Bristol-Myers Squibb

(BMY) - Get Report



(AMZN) - Get Report



(GLW) - Get Report


A loss of momentum was evident by Friday, when the Dow fell 64.64 points, or 0.6%, to 10,640.91, the S&P dipped 9.54 points, or 0.8%, to 1234.18, and the Nasdaq dropped 13.61 points, or 0.6%, to 2184.83.

It's getting close to early August, which is when market guru Woody Dorsey, founder of Market Semiotics,

still believes that a top will be made on the S&P.

"This rally is maturing," Dorsey says. "But right now it's more of a cat-and-mouse game, a delicate stage. The market's trying to make a top but it hasn't been able to make that happen quite yet."

One of the bumps hit by stocks this week was the bond market. The yield on the benchmark 10-year Treasury note rose to 4.28% from 4.22% last week.

The backup in yields is starting to make even the stocks of homebuilders look shaky. The Philadelphia housing index fell 0.6% during the week, even as existing and new-home sales reached record highs in June, and homebuilder

Pulte Home

(PHM) - Get Report

posted blowout earnings.

But it's not the end for the homebuilders, according to Dorsey. "There's still a tug of war, and the shorts aren't going to win just yet," he says. What could "really tip the housing market would be a heavy drop in the stock market and a big drop in consumer confidence."

Stocks in the interim need new catalysts if they're to continue making new highs. The positive earnings story and strong economic indications are already baked into current levels, to the point that they risk creating indigestion on positive news.

So, the market will be looking to rebuild the proverbial wall of worry; i.e., rebuilding some negative sentiment so that prices come down, allowing bulls to come back to the fore at some later point.

Dorsey still believes that starting the week after next and into mid-August, the market "will become much more vulnerable to heavy selling," which would set the stage for a real downside come September. Any following upside for the moment is unclear.

Inflation worries may provide the rationalization for the downside. The economy is undoubtedly out of the so-called energy-induced soft patch experienced in the spring, as evidenced by this week's economic data. Strong durable goods orders and the Chicago PMI point to a revival in the manufacturing sector. Blowout existing and new-home sales, and improving consumer sentiment keep pointing to strong consumption patterns.

And the second-quarter GDP, which showed inventories were dramatically drawn down, points to even stronger growth in coming quarters. But inflation pressures are building and that means the


will continue to raise rates well into next year. The GDP's personal consumption index, a measure of inflation, is now up 2.0% on year-to-year basis, compared with 1.6% in the first quarter.

This week suggests surging crude oil prices are apparently still not enough to scare the market into worrying about inflation. "There's definitely a lot of complacency in the market about oil at $60," Dorsey says. "Maybe the risk is that now it has to go up to $70 or $75 to stir the pot again."

Those prices will come within reach as the market approaches heating season ahead of winter, he predicts.

And if home prices also have declined by then, those high oil prices very well may mean that beer will again top wine for stretched-out consumers.

To view Gregg Greenberg's video take on today's market, click here


In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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