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US stocks rebounded last week as markets came to terms with the likelihood of a midsummer Federal Reserve rate hike, and oil prices stabilised.
Jobs data this week could confirm the US economy is pulling out of a soft patch, but it's unlikely to resolve the question of whether the bull market is dead. The stock market has staged a dramatic comeback since the February lows but, on a longer-term chart, it's stuck. It's been almost a year since stocks have recorded new highs, something that's highly unusual. According to one research firm, Cornerstone Macro, the broad Standard & Poor's 500 records an average of 20 new 52-week highs every year. Think about it this way, almost all Americans who check their retirement accounts daily have woken up to a losing hand every day since last July. At some point, they might just throw in those hands and cash in their stocks.
Every time the S&P 500 comes to the brink of a new record - at 2,100, it closed last week less than 3 per cent from a record - it seems to lose its nerve and retreat.
Similar chart-based and psychological barriers are observed in the oil market. Last week, oil futures, which have bounced back even more dramatically than stocks, almost doubling since mid February, couldn't get past the round number of US$50 a barrel.
Oil spent most of the week flirting with that level, hitting it briefly only to pull back. That's a psychological milestone but also close to the breakeven level for most US shale fields. It's also thought to be the "sweet spot" for the broad US economy, a level where drillers and petrol stations can turn a profit without petrol prices putting pressure on consumers' household budgets.
For many independent US drillers, oil's rebound has come too late. Hercules Offshore, which operates jack-up rigs in the Gulf of Mexico and elsewhere, is negotiating with creditors and could end up filing for bankruptcy for the second time in the space of a year.
One technician argues that the stock market is shaping up for a poor performance, unless it can break out soon and convincingly.
"Historically, calendar years that go without making any new 52-week highs end up in pretty bad shape," warned Carter Worth of Cornerstone Macro. "On average, price performance for the year in question is down 15.8 per cent."
Another money manager who couldn't be named because of his firm's policy, found evidence to support the opposite.
"The big question on everyone's mind is, does a year without a new high on the S&P 500 mean the bull market is indeed dead?" the money manager said. "We went back to 1950 and found there were 12 other times the S&P went a full year without a new high and six of those took place in the middle of a longer-term bull market. In other words, it is possible for a year to go by without a new high and the bull to still be alive - he is just resting. Is he resting this time? The good news is first-quarter earnings appear to have been a major trough and should earnings accelerate the second half of the year it could bode well for equities."
One positive sign for the broad stock market is leadership from the financial sector, said Joe Kinahan, chief derivatives strategist at TD Ameritrade. Financial stocks have led the way during some of the best streaks in stockmarket performance. But, for the last three years, bank and insurance stocks have lagged, as stubbornly low interest rates dried up both lending profits and investment returns. Now investors are hungry for bank stocks again because Treasury rates are rising in advance of a rate hike. Bank loans for everything from houses to boats are tied to Treasury rates.
Until two weeks ago, stock and bond traders had steadfastly ignored Fed officials' vows to raise interest rates soon. Central bankers evidently resolved to make their forecasts more explicit to avoid a sudden correction in Treasury rates. Several officials have promised to vote for a hike at the June or July meeting, while chairwoman Janet Yellen said last week she expected a hike in the "coming months".
Ms Yellen did give herself an "out", saying the plan was conditioned on continued strength in the jobs market. Suitable strength is expected in this Friday's jobs report. The language in weekly jobs reports and monthly housing reports has taken a significant turn in May. Instead of being the "lowest number of layoffs" or "highest number of sales" since the financial crisis, layoffs and home sales are the best since 2006 or 2007, or even earlier. The economy is finally back to its pre-recession peak.
Now, the question is whether the stock market can reach its own peak.