In the ongoing bad-news-is-good-news saga, last week’s surprisingly weak jobs report led to speculation that the Fed would delay hiking interest rates, which is perceived as a positive for equity investors. So, bulls are getting a boost for the moment, although those previously hard-won round-number price levels for the major indexes are now serving as ominous overhead resistance that will likely require a strong new catalyst to break through. Whether stocks are destined for downside or upside from here, Q1 earnings season starts this week and will likely provide the catalyst.

U.S. stocks found support once again last week and rallied on strong volume. Of course, the main catalyst was the FOMC policy statement on Wednesday that maintained its dovish language with a pledge of considerable time before raising the fed funds rate and adding that it would be patient as it begins the process of normalizing monetary policy. The result was yet another classic V-bottom. Ho, ho, ho. Say hello to Santa Claus.

Eleven of the past twelve market days have seen the market move higher . . . generally to new all-time highs. The S&P 500 closed today at 1695.53, yet another new high.

Could the upward run continue?  Yes, it could and likely will for at least three reasons.  1) Funds continue to flow from money market and longer-term fixed income funds into the equity market; 2) valuations have not exceeded reasonable variations from the norm—a tad high here and there but with bargains remaining; 3) the gains have not been powerful, large up days on large volume indicating a blow-off top.

Where is the market looking for opportunities? 

This week began on the same negative tone that last week ended on. There were no economic reports today, but an unexpected European problem surfaced as the Constitutional Court in Portugal ruled out a number of austerity measures that the Portuguese administration had implemented, pursuant to the requirements of the ECC, IMF and EC.  This creates a dilemma for both Portugal and the troika. 

January was a good month for the market as the S&P 500 reached a new 5-year high at 1498, up about 5% for the month.  February has started strong, up yet another 1%. Mid-caps dominated the month along with Small-caps, but no style/cap did poorly.  For the month, the leading sectors were Healthcare, up a whopping 9%, as our forward looking SectorCast had predicted, along with Industrials, up about 8.5%, followed by Financials and Energy, up about 8%.

This could prove to be one the most interesting market weeks of the year, assuming the market ever opens.  Talk about uncertainty!  We can add “Frankenstorm” to the litany of other uncertainties such as the election and its impact on a functional Congress and the ongoing concerns in Europe, Middle East, China, and Japan.

We’re coming down to the final sleepy weeks of a relatively uneventful summer in the equity markets. Volume is quite low, as is expected this time of year with investment managers in vacation mode. Nevertheless, the S&P 500 has now recovered all of its losses since the “Sell-in-May” crowd hit the market hard, sending the S&P 500 falling 9% from a close of 1406 on May 1 to 1278 on June 1.

Markets have been signaling a willingness to look past the deluge of troubling news and move higher. This is bullish behavior. On Tuesday, market psychology displayed its positivity as initial weakness on bad news was quickly reversed. Rather than demanding that the Fed initiate a QE3, investors seem to be happier with indications from the Fed that the economy might be able to muddle along without it.

Stocks have rallied since Friday, largely due to some promising developments out of Europe toward addressing their sovereign debt issues and shaky banks. As I said last week, global investors hoped for a sign of commitment from EU leaders at their latest summit to stimulate growth, create a banking union, and debt mutualization (e.g., Eurobonds). What they got was pretty close. And U.S.

It is fairly clear that what the market wants is a solution, or more likely, an entire truckload of solutions, to the issues that have polarized the globe. I hope you’ve noticed that the market passionately hates uncertainty!  The market’s behavior of the last few weeks speaks to this attitude.