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Stocks surged Tuesday, in the best start to a month in more than three years. The Dow closed up 2.1 percent at 16,865 and the S&P 500 bounced 2.4 percent to 1,978. Equities were boosted by a few factors, including February ISM manufacturing data, still in contraction at 49.5 but better than expected. Oil also rallied to close near the key $35 per barrel area, and that also helped lift stocks.
The ISM is the latest major data to show an upside surprise. Construction spending was reported on Tuesday as up 1.5 percent in January, which was better than expected, and durable goods data last Thursday was also better than expected.
"I think at the start of the year, there were the big worries. We're going to have a recession, and oil was going to go to $20, and the Fed was whistling past the graveyard, and no corporation would make any money again, and everything was going to over the cliff," said John Canally, market strategist and economist at LPL Financial. "Data this week clearly lowers the recession odds, and oil is stabilizing. People are a little more comfortable with how you're going to get out of it."
Central bankers also helped markets Tuesday. New York Fed President William Dudley sounded concerned about recent market turmoil, leading traders to speculate that the Fed would move away from its forecast for four rate hike this year.
European Central Bank President Mario Draghi on Tuesday said that euro area inflation trends are weaker than expected, and that led to talk of more ECB easing when it meets next week. Traders also pointed to comments from U.S. Treasury Secretary Jack Lew who said commitments by China and other countries lowered the threat of currency depreciations that could hurt the world economy.
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Canally said there's clearly signs of relief about the economy. "It's not very good, but it's not a recession. I think in the beginning of the year, the chances of recession had gone up, but they've come down in the last couple of weeks," he said. "We still have to get through tomorrow's (ADP) data, and Friday with the jobs report, then the ECB next week and the Fed the Wednesday after that."
He said he will be paying close attention to how much rising prices or inflation are referenced in the Fed's Beige Book. Canally also said the Fed could lower its interest rate forecast when it meets later this month, and if it does and the dollar moves lower on that, the S&P could revisit its highs.
"If the Fed is stubborn maybe we go back to test 1,812 or go lower," he said.
Canally said the next battleground for stocks is the 2,030 level on the S&P 500. "We're in between ... the 1,950 level and 2,030. I think we may take a little pause," said Canally. He said the economic data will need to continue to come in better, but if there are more signs of inflation, the market could begin to fear Fed rate hikes.
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Paulsen said It's early to talk about new highs for the market, but he is seeing some promising signs. "I think one of the most telling market data points is the JNK ETF. It's almost back to unchanged for the year," he said.
SPDR Barclays High Yield Bond ETF (JNK) was up 1.8 percent Monday and is now unchanged for the year. The JNK ETF reflects activity in the high-yield market, where spreads have been narrowing after shooting wider in January and February.