The Week Ahead: Will the Spring Thaw Push Stocks Even Higher?

As the US stock market ended February on a high note, MoneyShow's Tom Aspray examines whether stocks can push even higher in the months ahead.

As the major averages made their lows in early February after a dismal January performance, it was hard to find all the bullish analysts that were dominant at the end of 2013. The Dow Industrials had lost 5.6% in January while the S&P 500 lost 3.6%.

Those who believe that a lower January means a down year for the market were also nervous about doing some new buying The so-called January barometer has been right 73% of the time in the last 35 years, but as I pointed out in early February, it has been wrong five times since 2000.

As I noted then, in each of those years, the positive readings from the NYSE Advance/Decline favored a bullish outlook for stocks in those years. The current strong readings and the additional new highs in the A/D line are bullish for 2014. The drop from the mid-January highs was enough to briefly reduce the too-high bullish sentiment, but as we get the long-awaited spring thaw, what can push stocks higher in the next few months?

Friday's weaker-than-expected revision of 4th quarter GDP to 2.4% made some traders nervous in early trading, but it did not last long. Apparently, many were not ready to believe the new Fed Chair Janet Yellen when she attributed the weak economic data to the weather. As one who has spent this winter in the middle of the East Coast weather, I find her explanation easy to believe.

Many other market analysts are not buying stocks because of the bond market's action, so far, in 2014. The yield on the 10-year T-note closed 2013 at 3.023% and is now trading around 2.687%. Typically, one expects that rates will move higher as stocks rally since the price appreciation in the stock market is assumed to reflect an improving economy.

Bond traders are thought by many to be more astute than stock traders so some have concluded that the lower yields mean that the economy is actually weaker than most expect. I think there may be another explanation.

Last week's sale of $35 billion in 5-year Treasury notes went very well as there were $2.98 in bids for every $1 offered. This was followed on Thursday by the sale of $29 billion in 7-year notes, which was also well received. In total, $109 billion were sold and demand was high, making it one of the best auction weeks since 2012. Overseas demand was high and many global investors, in my opinion, think the US is the best place to invest in safety. I think this can explain the divergence between stocks and bonds.

In Friday's Wall Street Journal, it was pointed out that the overall trading volume in the popular Spyder Trust (SPY) has been relatively low; about 20 million shares lower than it was during the same period last year.

The monthly chart of SPY, along with its on-balance volume (OBV), paints a much different picture. The monthly OBV moved above its WMA in August of 2012, line 1, and continues to suggest strong accumulation of this ETF.

The SPY has gained over 32% and the OBV shows a pattern of higher highs with another new high in December. It is very close to making another new high in February and will make a new high in March if the SPY closes higher. The SPY is still 5.6% below its monthly starc+ band for March, which is at $197.

In the Eurozone, the main focus was on the problems in the Ukraine and the saber rattling by Russia. The Russian ruble was hit hard last week as was their stock market. It looks like the post-Olympic glow is over. The Eurozone did get a surprise late last week when inflation came in a bit higher than expected. This should allow the ECB to leave rates unchanged for now.

On the global front, the biggest news was the sharp drop in the Chinese yuan. It apparently was the result of the action of the People's Bank of China as they instructed the large state-controlled banks to aggressively buy dollars.

On the chart, the rise in the rate (weakening yuan) looks pretty dramatic, but for the currency markets, it was not a big percentage move. However, for a currency that normally trades in a tight range and is tightly controlled by the government, the move was significant. Continued weakness in the yuan could give its economy a much-needed boost as it will make their goods more attractive.

NEXT PAGE: What to Watch

Page 1 | Page 2 | Page 3 | Page 4 | Next Page