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The Markets This Week

May 11, 2015 | Weekly Commentary

After sliding 2% at one point last week, the stock market reversed and climbed within spitting distance of previous highs. Boosted by bullish employment data Friday and a softer dollar, the Dow Jones Industrial Average, made up of mega-caps with lots of overseas sales, rose 167 points, or nearly 1%, to 18191.11. A surprising electoral victory Thursday by the U.K. Conservative Party fuelled gains in Europe, which spilled over to U.S. stocks.

Despite the rally, the market was again unable to break out of a tight range that began last November. Investors aren’t enthusiastic enough about macroeconomic data to send shares to new highs. The Standard & Poor’s 500 index rose 8 points to close at 2116.10, just below the previous high, 2117.69. The Nasdaq finished flat, at 5003.55.

Friday, the Labor Department said the U.S. added 223,000 jobs in April, broadly in line with expectations and much better than the 85,000 in March. The unemployment rate fell to 5.4% from 5.5%.

Those numbers were warm enough to assuage slowdown fears caused by a rise of just 0.2% in first-quarter gross domestic product, reported late last month, says Daniel Morris, global investment strategist at TIAA-CREF. Yet they weren’t hot enough to spark worries that the Federal Reserve will raise interest rates sooner than September, marking the first rate hike in nine years.

There is strong resistance at the 2120 level on the S&P 500, says Yousef Abbasi, a market strategist at JonesTrading Institutional Services. “Investors don’t want to pay more than the market’s price/earnings ratio of 18 times, when the U.S. economy might grow in the range of 1% to 2% in the first half,” he says.

“It’s hard to come up with a scenario where you get a real positive surprise that would boost the market further,” adds Morris.

Brian Lazorishak, a portfolio manager at Chase Investment Counsel, is looking for a correction near-term, although perhaps not a 10% drop. “Valuations aren’t cheap; we’ve gone years without a real correction, and the May-October period is historically a weak period for equities,” he says.

Even a 5% pullback might be good for the bull, as it would “suck out some optimism and bring in enough pessimism” to set up the market for a rally in the back half of 2015, he says.

(Source: Barrons Online)

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