Stocks benefited from economic "green shoots" in April but the question is whether the rally will be rained out in May.
The validity of the old adage "sell in May and go away" is drawing just as much debate from traders as the idea that the stock market has become overbought and must pull back before it can move ahead.
Stocks rallied more than 2 percent Wednesday after the Fed reinforced the idea that there are some signs the economy is not deteriorating as rapidly as it had been, despite a greater-than-expected 6.1 percent decline in first quarter GDP. The market did latch onto better-than-expected consumption numbers in the GDP report.
Wednesday's market move gives the S&P 500 a 9.5 percent gain for April; the Dow a 7.6 percent gain, and the Nasdaq a near 12 percent gain. The S&P, at 873, is at its highest close since January 28.
The fate of Chrysler, weekly unemployment data and some key earnings from Exxon and Procter and Gamble are on the agenda Thursday. There is also a 10 a.m. Congressional hearing on U.S. response to swine flu.
"The market closed off its lows. Volume was decent. It feels pretty good," said one trader after Wednesday's close. "The street was trying to take a pause. The market was kind of trading side ways.. But as you see, the strength now is forcing peoples' hands a little bit. We'll wait on May 1st to see what happens."
But Tim Smalls of Execution LLC, who last week saw a stock market looking for direction, said Wednesday that things have changed and the market may now have reached the end of its run, for now.
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"There's been a fundamental change," he said. Smalls pointed to the fact that the market is ignoring the spread of swine flu, which is being upgraded in severity by the World Health Organization, as well as the bad GDP number.
"The market has the ability to absorb bad news and look down the road. Three months ago, it could not do that. It didn't even have the ability to absorb good news. Now people are saying: 'The news is not so great, but it's probably going to be better looking out,'" he said. "The looking forward has been a little bit more positive. It may be a signal that we're at the end of this move. It may be that we've come a little too far, too fast. When everybody's turning positive, it's time to take a breather," he said.
The Fed, at the end of its two-day meeting Wednesday, did just what the stock market expected. It issued a statement sprinkled with some hope about the economy. The Fed also said it would maintain exceptionally low interest rates for an extended period, and it kept the types and amounts of securities it is purchasing at the same levels it previously announced.
That, however, was a surprise to some in the Treasury market which had been rife with rumors that the Fed might increase the amount of Treasurys it is buying.
After the Fed's statement, yields jumped as traders sold the 10-year and 30-year. The 10-year rose above 3.11 percent at one point, and the 30-year crossed 4 percent.
"It was especially interesting for a non event Fed statement," said Zane Brown, fixed income strategist at Lord Abbett. "..I guess more people had expected or hoped for an increase in he Fed's purchase program for long Treasurys." Zane pointed to the fact that Treasury yields are now higher than they were on March 18, when the Fed announced its intentions to buy $300 billion in Treasurys and increase its purchases of mortgage securities.
"If we examine what happened to mortgage rates after March 18, they continue to come down," he said. "The Fed felt all along if they would have the 10-year above 3 percent for a substantial period that would have an adverse impact. Right now, if we keep pushing the 10-year (yield) higher and we stay at these levels then it's going to be difficult for them to get mortgage rates lower, and it may start making it difficult to keep them lower."
David Ader, who heads interest rate strategy at RBS, said he expects yields to keep rising for now, and he also said that could cause mortgage rates to rise.
"This is not really about the economy. It's not about some signs of stability as per the Fed's FOMC minutes. There is some improving data but there's still caution out there. This is about supply. We've had three auctions this week, and these were the easy ones - 2s, 5s and 7s, and they all tailed. What happens when we get into the hard ones - 3s, 10s, and 30s (next week)," he said. The Treasury auctioned more than $100 billion in new notes this week and expects to do billions more next week.
Ader said the 10-year yield has now broken out of its recent range, and he now expects it could head up to about 3.25 percent. "Those are the levels that stand out on the chart. One thing you have to think about is: 'Is there a level in here where Treasury yields hurt the recovery, hurt the green shoots?'" he said.
What to Watch
Some resolution was expected by Thursday for Chrysler. The maker of Jeep was expected to be steered into the arms of Italy's Fiat but unclear was whether it would file bankruptcy first. President Obama during his Wednesday evening press briefing said the details had not been finalized, but that he was hopeful there would be a viable solution for Chrysler.
In addition to weekly jobless claims at 8:30 a.m., Thursday's data includes personal income and the employment cost index, also at 8:30 a.m., Chicago purchasing managers is at 9:45 a.m.
Thursday's earnings include Comcast, Cardinal Health, Celgene, Apache, AstraZeneca, Marathon Oil, Motorola, Travelers, Viacom, Eastman Kodak, NYSE Euronext, Starwood, Safeway, Williams Cos and Tyco.