Stocks are at a critical juncture as the second quarter begins Wednesday, and there's a chance sideways could be the new normal for the time being.
Now that the first quarter is over, the market faces headwinds from an anticipated batch of bad economic news and the upcoming earnings period. Investors, who rode stocks higher as the first quarter waned, may start to take profits into the start of the second quarter, traders say.
The Dow finished Tuesday up 79 at 7603 while the S&P 500 was up 9.98 at 797.51. For the quarter, the Dow was down 13.3 percent, but it is up nearly 18 percent from the March 6 low. The S&P was up 19.7 percent from its March low, but down 11.7 percent for the first quarter.
The Nasdaq finished Tuesday up 26 at 1528. It is down 3 percent for the quarter. Tech was the best performer for quarter, up nearly 4 percent. Financials were the worst, down nearly 30 percent. But on Tuesday, financials rose 7 percent, ending the month with an 18 percent gain.
"We're going to have to wait and see what comes out of it," said Art Cashin of Tuesday afternoon's rally. "You have two things going on here. First, they wanted to buy some of the winners so they could show them in their portfolios, but today it's more 'add to your winners.'"
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Cashin, director of floor operations at UBS, said one of the major focuses is Thursday's vote by the Financial Accounting Standards Board on mark-to-market accounting. "For now, everybody including the rumor mongers are coming out talking about mark-to-market." If FASB changes the fair value rule in a way that would allow companies to reduce writedowns that could be a big plus for the financial sector and market.
"That could break the market above its upper range," said Scott Redler of T3live.com of the FASB vote.
"There's going to be about four to five things hitting the market and the market's direction will be determined by the news and how the market deals with it," said Redler, who follows the market's technicals.
Redler pointed to the G-20 gathering Wednesday and Thursday; the FASB vote Thursday, and the Friday unemployment report. "The market just established a new range where we can define support and define resistance. It will all depend on how the news breaks. The new upper range finds new support in the 777 to 782 range on the S&P, and resistance at 825 to 830," said Redler.
Goldman Sachs strategist David Kostin, in a recent note, highlighted points that are at the heart of the current debate in the market. Did stocks bottom in March? If so, the earnings period could be a rough time so sideways movement makes sense.
Kostin says if March 9 proves to be the cycle low, the market may experience " two months of unimpressive or even negative returns before trading higher in a sustained fashion toward our 2009 year end price target of 940."
Yet, Kostin and other Goldman strategists said they are sticking with a defensive positioning until they see a firmly established market trough. "We likely have passed the low this cycle. But we are skeptical that the S&P 500 has firmly established a bottom." They noted the S&P rallied more than 20 percent but the risks now appear on the downside.
They also note it's better to rotate into cyclicals after the trough than to be too early. "We believe a deceleration in Financials losses is a key pre-condition for the market to sustain a rally," they wrote. They also warned of a potential triple dip. "Timing the true cycle trough is further complicated by the fact that the S&P 500 often re-tests the trough level both before and after the actual bottom."
They noted recoveries have three stages—the pop, then a stalling period, and then a sustained rally. In the last five bear markets, the S&P averaged returns of 15 percent in the first month out of the trough, but then stalled for the next two to three months.
Kostin and the strategists also note that the sectors that perform well during a significant bear market rally typically are the ones that rally in the months after the market's trough.
Plenty of data greets markets Wednesday, including the ADP private employment report for March at 8:15 a.m EST. It is basically a warm up to Friday's government jobs report. ISM manufacturing data, pending home sales and construction spending are released at 10 a.m.
Auto sales, released throughout the day by manufacturers, will be a big focus after the government's move this week to take the wheel in the industry's restructuring.
'Group of 2'
Amidst the din of G-20 leaders scrambling for attention on a variety issues, there is one very important side meeting to watch. On Wednesday, President Obama will hold his first bilateral talks with President Hu Jintao of China.
China and the U.S. have taken the lead on an issue U.S. officials see as critical to a global recovery—financial stimulus. China, ahead of this week's meeting, has made several interesting public comments on the dollar, the U.S. deficits and the desirability of a new world reserve currency. Treasury Secretary Timothy Geithner though has called China supportive, and the White House has made reassuring comments about the dollar's role as reserve currency for a long time to come.
The formal G-20 summit is Thursday. Forex.com's Brian Dolan said if anything, the G-20, as a group, will agree on the need for financial markets reform but he does not expect much else. The Europeans will say that they have done all they can on the economic front, and they will engage in new stimulus spending. "It will look like they are throwing up their hands, and we are going it alone," he said.
The dollar weakened after Monday's gains. Dolan said he expects the dollar to strengthen during the G-20 meetings, and stocks could weaken. "It will likely be viewed as the economic powers are not coordinating," he said.
Dolan said he expects to see the dollar benefit as risk assets and stocks are under pressure until May, when he thinks some of the economic data will start to improve.
Oil rose $5.06 per barrel, or 11.4 percent for the quarter, to $49.66.
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