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Associated PressLate-afternoon rallies drive stocks to levels unseen in a year, despite lackluster economic news.
NEW YORK - Wall Street investors expecting a major pullback after three months of rallies were pleasantly surprised this past week: Stocks were able to notch another week of gains despite negative or mixed economic news, largely on a series of late-day advances.
Analysts say the late-afternoon surges could well signal a new investor bullishness. That's because, barring a sharp decline during the day, increasingly optimistic investors are willing to jump into the market for fear of missing the next big rally.
"Everyone is starting to realize the stimulants - with the Federal Reserve's policy, the tax cuts - are starting to work," said Ralph Acampora, director of technical research at Prudential Securities.
"The market's job is to be an economic forecaster," he said. "Its ability to rally is telling us the market will recover. It's saying there's going to be a recovery, and people are buying in anticipation."
The Dow Jones industrials and the Standard & Poor's 500 index posted their third straight week of gains, reaching levels not seen in a year. (The Nasdaq composite index, which has outpaced the other gauges this year, slipped lower for the week.) Since March 11, when the rallies began, the Dow has gained 21 percent, the Nasdaq is higher by 28 percent, and the S&P has risen 23 percent.
Stocks slid Friday despite growing hopes for an interest rate cut after a University of Michigan report indicated a sharp drop in consumer sentiment, and that gave investors "a good reason to take profits," said Barry Berman, head trader for Robert W. Baird & Co. in Milwaukee. "The market is just pulling back a little bit."
Michigan's widely watched index of consumer sentiment fell to 87.2 in mid June from May's reading of 92.1, Dow Jones Newswires reported. The reading was far below the level of 93 that market watchers had been expecting.
On the plus side, expectations have been growing that the Federal Reserve would cut short-term interest rates at its June 24-25 meeting. Those hopes were further bolstered Friday by a Labor Department report that wholesale prices fell 0.3 percent in May, following a record drop of 1.9 percent the month before.
While the reports suggest the economy could be hit by deflation, a damaging trend where prices for goods and services decline overall, investors hope the Fed will cut rates at its next meeting to combat the trend of lower prices.
"I wouldn't say today's declines are the start of a major pullback," said Keith Keenan, vice president of institutional trading at Wall Street Access, a New York-based brokerage firm. "There's still a significant amount of performance anxiety.
"The psychology is incredibly bullish," he added, referring to Wall Street's three months of rallies. "Most money managers who are underperforming this market are buying. That's why the market has been so resilient in the face of bad news."
On Tuesday, for example, the Dow staged a late-day rally in the absence of significant positive economic news, defying predictions of some analysts who believed the market was due for a selloff after running up so quickly.
Blue chips followed a similar pattern Wednesday, surging 128 points after investors shook off a Texas Instruments' earnings warning. The main gauges rallied again late Thursday to close higher following tepid reports on jobless claims and business inventories.
Even Friday, the blue chips were able to trim a midday loss of 122 points to close 79 points lower after a spurt of buying in the final hour.
Analysts attribute the late-day gains to growing investor confidence. With the second quarter nearing a close, many portfolio managers who were too skittish to commit to stocks a few weeks ago are pouring money into the market to avoid missing additional rallies.
"People are more optimistic and willing to push prices up," said Sam Burns, research analyst for Ned Davis Research in Venice. "Even a few signs of improvement in economy and earnings are enough to get people going after excessive bearishness in March."
"It's just a combination of a reversal of excessive pessimism recently and the monetary and fiscal stimulus," he said.
Indeed, some analysts believe the market is now firmly on an upward trend with only minor pullbacks likely. Acampora, for example, believes the Dow will hit 10,000 by year's end, while others have predicted an additional 25 percent of blue-chip gains from the March 11 low.
"It hasn't happened in a year where we've had such broad-based participation amongst all stocks," said Steven Goldman, chief market strategist at Weeden & Co. "The tide is turning. ... It's been three years that we've seen declines, but no decline lasts forever."
Still, risks remain. Many analysts believe the market will be vulnerable during the second-quarter earnings warnings season in the coming weeks. Because investors have been betting on an economic rebound in the second half of the year, data suggesting otherwise could quickly quash the rally.
But Subodh Kumar, chief investment strategist for CIBC World Markets, doesn't think that will happen. He says more upbeat investors are now viewing a company's profit warning, such as that of Texas Instruments, as unique to the firm, and not reflective of industrywide weakness.
"I don't think investors have become excessively optimistic," he said. "My experience is that in the early stages of an earnings recovery, markets don't pull back as dramatically as people expect."
For the week, the Dow rose 54.33, or 0.6 percent. It closed Friday at 9,117.12. The Nasdaq had a weekly loss of 0.93, or 0.1 percent, closing at 1,626.49 on Friday. The S&P had a weekly gain of 0.85, or 0.1 percent, finishing at 988.61.