Stock Market Rebounds But More Selling Welcomed


The stock market rebounded from oversold levels Monday as bargain-loving value investors took advantage of a long-awaited chance to buy prime rib at ground-chuck prices.

At the same time, robust retail sales for March showed that the consumer spending freeze brought on by frigid weather the first two months of the year has melted.

SPDR S&P 500 ( SPY ) added 0.79% to 182.94.PowerShares QQQ ( QQQ ), tracking the Nasdaq's 100 largest nonfinancial stocks, rose 0.8% to 84.78.SPDR Dow Jones Industrial Average ( DIA ) popped 0.89% to 161.45.

IShares MSCI EAFE Index ( EFA ), tracking developed foreign markets, picked up 0.57% to 66.64.IShares MSCI Emerging Markets Index ( EEM ) fell 0.22% to 41.74.

March retail sales, up 1.1% month over month, rose to their highest levels since September 2012. The better-than-expected data reported Monday came with upward revisions for January and February that show consumer spending growing 2.1% in the first quarter over the prior quarter, according to research firm IHS Global Insight.

"It is clear that consumer spending and confidence weathered the unseasonably colder winter, and shoppers are ready to open their wallets for big ticket items," IHS Global Insight director of consumer economics Chris Christopher wrote in a note.

Outperformance in long-term bonds and noncyclical sectors such as utilities this year suggests that investors have become very risk-averse and are seeking safe-haven assets.Utilities Select Sector SPDR (XLU) -- covering this year's leading sector -- has rallied 11% this year, while SPY has shed 1%. Last year XLU's 13% return lagged far behind SPY's 32%.

IShares 20+Year Treasury Bond (TLT), tracking long-term government bonds, has returned 10% year-to-date as yields on benchmark 10-year Treasurys fell from 3% at the start of the year to 2.64%.

Brad Lamensdorf, co-manager ofRanger Equity Bear ETF (HDGE) and chief investment officer of the Lamensdorf Market Timing Report, recommends that investors move heavily into cash or short stocks as a hedge.

Margin debt, or the amount of money that traders borrow from their brokers, has reached an all-time high, he says. That fact suggests that a cascade of selling could ensue when brokerages make margin calls, in which clients have to sell stocks to pay back their loans. In addition, corporate insider selling hovers near 20-year highs, indicating that the people who know the most about corporate prospects have lost confidence.

DIA found support at its 50-day moving average Monday. But SPY and QQQ have broken below that key technical level, indicating short-term weakness -- led by heavy sell-offs in biotechnology and Internet stocks.SPDR S&P Biotech ETF (XBI) has tumbled 6% year-to-date, andFirst Trust Dow Jones Internet Index (FDN) dropped 8%.

About 18 months have passed since the stock market corrected more than 6%, so a correction is necessary to work off some of the speculation and "irrational exuberance," says Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research.

What The Market Needs

"This near-term pullback in a bull market is actually exactly what the market needs and is fundamentally sound for the long term," Frederick said in an email. "Volatility hasn't spiked to panic levels, and the rout remains largely confined to momentum names."

Frederick believes that the S&P 500 will retreat to its early February low of 1,746 at most, down 8% from its new all-time intraday peak at 1,897 on April 4. The Federal Reserve's near-zero interest-rate policy leaves investors with few alternatives to growing money outside of safe-haven Treasurys.

"The S&P 500 is likely to eclipse 1900 in due course," Sam Subramanian, founder of AlphaProfit Investments in Sugar Land, Texas, said in an email. "The economy continues to expand... . Inflation is low, and the Federal Reserve maintains an accommodative monetary policy to spur job creation."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , ETFs

Referenced Stocks: SPY , QQQ , DIA , EFA , EEM

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