Stocks Continue Rally – Can it Last?

With the Federal Reserve keeping interest rates low and Janet Yellen expressing fears about a rising dollar having negative effects on exports, Wall Street’s attitude remains bullish. The recent stock market rally is reaching a new high for the year. Can it last? There are industry experts predicting that it can as long as the right alignment comes into play.

Global Stocks

This week, global stocks hit the pause button on the recent rally since they crept lower bringing a turbulent first quarter for the world’s risky assets to a close. For instance, the Stoxx Europe 600 edged down by 1.1 percent. This happened about halfway through the period. Banking shares and oil prices also fell. Gold shifted up slightly while commodity prices drooped a bit. When it came to currencies, the euro rose by 0.3 percent against the dollar coming in at $1.1373. In addition, the dollar couldn’t gain on the yen, which was at ¥112.3520. For the rally to resume, market analysts report that a few fundamentals must come together.

Vindicating the Bears

Bears have been calling the recent rally a relief, so as the markets begin to pull back, they are surely feeling a bit of vindication. Some of the bear market analysts are bringing up a similar recovery situation that occurred between October and November. This earlier rally eventually failed. Katie Stockton, a key technical strategist for BTIG, said, “Rallies that happen too fast and go too far, with sentiment changing from one extreme to another, usually do not happen at market bottoms.” She went on to say, “Not only is this too reminiscent of the last autumn rally, the VIX index is behaving the way that it did in early 2007.” The VIX index, which insiders often refer to as the fear meter for Wall Street, gauges market volatility for the upcoming 30 days.

Stockton said, “Our model indicated a buy signal for the VIX a week ago, its first since the inversely-correlated S&P 500 in early November. We see this as further indication that the rally is on its last legs.” Stockton did confirm that she would have to change her opinion regarding the stance if the market continues to surge above several major technical levels.

Can the Rally Continue?

According to analysts, four elements need to align for the rally to continue. First on the list is oil gains. The February to March rally has been closely connected to the rebound in oil prices. In fact, analysts report that there is a 90 percent association between the shifting stock markets and changes in oil prices. It’s unlikely that the market will continue to rally without oil prices following suit. However, if the year’s summer driving season ends on a strong note and the U.S. continues to slow oil production, crude could increase in strength.

A weaker dollar is another fundamental element that needs to align for the rally to keep going. This will help manufacturers. Channing Smith, a portfolio manager at Capitol Advisors, said, “A stronger dollar is a headwind, but the strength has abated.”

Earnings must also come in line. The rally that occurred after the February lows corresponded with the largest downward adjustment to first-quarter earnings in seven years. The biggest correction came from the energy industry, but all 10 major sectors confirmed earnings cuts from the start of 2016. The 10 main sectors consist of industries like utilities, finance and telecom. Decreased expectations combined with positive earnings may deliver a much-needed jolt to the market. For this to happen, the market must remain resilient for a few more weeks since mid-April is when the earnings reports really begin.

Increased consumer spending is the last element that needs to align for the rally to remain in effect. According to reports, current consumer spending is flat. Personal spending data and retail sales confirm that Americans are being frugal with their money and saving. If this trend continues, corporate earnings will see their profits diminish. Recent data does verify a slim improvement instead of a contraction. During last year’s fourth quarter, America’s economy grew at a rate of 1.4 percent. In addition, the economy is predicted to expand by this same amount for the first quarter of 2016.

Holding out Hope

If oil prices, a weaker dollar, earnings and consumer spending come together, stock market gains may linger. The Federal Reserve’s decision to delay raising interest rates could be another factor that causes the stock market rally to continue. If rates remain low, then the equity markets are likely to stay on the upside. For additional information about the current market conditions, visit the Personal Money Store’s site.

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