U.S. Equity Market Radar (March 19, 2012)

U.S. Equity Market Radar (March 19, 2012)

The S&P 500 Index rallied by 2.4 percent this week to the highest level in almost four years, the biggest weekly gain year-to-date. The rally was driven by the financials, industrials and technology sectors.

Strengths

• The financials sector was the best performer this week as the Federal Reserve announced that 15 out of the 19 largest U.S. banks passed a stringent stress test that assumed a 13 percent unemployment rate, 50 percent drop in stock prices, and 21 percent decline in home prices. J.P. Morgan Chase raised its quarterly dividend by 20 percent and announced a $15 billion stock buyback.
• The industrials sector was underpinned by strong performance of railroad companies led by CSX. The company forecasted record full-year earnings, with higher demand for automotive, metal and housing-related goods offsetting lower coal shipments.
• The building products and real estate services groups were among the best performing industry groups in the S&P 500 this week, as multiple surveys suggested February homebuyer traffic would reach a record high, thanks to enhanced affordability, improved buyer confidence, and mild weather.

Weaknesses

• The utilities sector was the worst performer this week as investors preferred to take on more risk with market volatility continuing to slide. Higher treasury yields also weighed on this income-generating sector.
• The consumer staples sector also underperformed as a result of risk-taking investor behavior.
• Newmont Mining dragged the single-constituent gold industry group to be the biggest laggard this week, with the correction in gold prices on the back of the Fed’s reticence on further quantitative easing programs.

Opportunities

• Large banks pushed the S&P 500 to new highs, a potential sign of further market strength based on historical observation that bull markets tend to be led by financials.

Threats

• After such a strong start to the year, a pullback or consolidation in the market would not be surprising.
• The S&P 500 is arguably overbought in the short term and could be vulnerable to profit taking.