EmailThe trading volume in 2012 hasn't been anything to write home about, but the gains so far in the equity market have provided reason to call, write, email, text, Skype, and send smoke signals home about.
Through the first five days of trading, the S&P 500 has increased 1.8%, led by the performance of the more economically-sensitive materials (+4.1%), financial (+3.6%), industrials (+3.2%), consumer discretionary (+2.6%), information technology (+2.3%), and energy (+2.2%) sectors.
The strength of these groups has followed reports of better-than-expected economic data in the U.S. and, in some instances, rebalancing action following their underperformance last year.
The positive start this year is not unlike the one we saw in 2011, with the one exception that it is a stronger start. Last year the S&P 500 rose 1.1% in the first five days of trading and ended January up 2.3%.
There is a notable tone of resilience in the equity market right now, which is remarkable knowing that the yield on the Italian 10-year note -- an albatross for the market last year -- has moved back above 7.00% (currently 7.13%).
We are seeing a bullish bias again this morning that is setting the stage for a strong open. There are three factors attracating added attention for the positive slant:
1) Alcoa's (AA) earnings report
The aluminum maker missed the Capital IQ consensus estimate by $0.02 but said it expects global aluminum demand to increase 7% in 2012. With all of the fear about the EU falling into recession and China suffering a hard landing, Alcoa's forecast for increased aluminum demand has qualified as a pleasant surprise.
2) China's trade balance report
China reported a 13.4% increase in exports and an 11.8% jump in imports in December. The import growth was a little more than half the growth rate registered in November. The slower growth prompted speculation that China will soon announce new measures to ease its monetary policy. China's stock market surged 2.7% on the idea, as well as reports the government will endorse policies aimed at spurring investments in the Chinese stock market.
3) Fitch indicates the AAA rating for Germany and France will be safe in 2012 and that it doesn't see a need for Italy to restructure its debt
A number of major European markets are up better than 2.0% at this juncture, with Italy (+3.3%) leading the way as the interest rate on its government debt continues to rise.
Those three factors are the focal points of most media reports. We will put forth a fourth factor, however.
In particular, we think the chase factor is in play. That is, the equity market's relative strength, and a growing attention to good news versus a fixation on bad news, is fostering some buying interest predicated on a fear of missing out on further gains and a fear amongst short sellers of being rolled over by future gains.
The S&P futures are currently 1.0% above fair value. That is a good indication for the cash market, which should have more room to run if it follows the path today of major foreign markets.
--Patrick J. O'Hare, Briefing.com
Patrick J. O'Hare is Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial, please email researchsales@briefing.com.
