Markets: News  

Burst in yields, S&P 500 at 1,400 bring back bulls

LOS ANGELES (MarketWatch) -- If you just looked at the day-to-day moves in stocks this week you might have missed it, but the stock bulls look like they've dipped a hoof or two outside the corral.

U.S. stocks on Friday were down for the first time in six sessions, but still up for the week thanks to a string of small daily advances. That would be their fifth weekly rise and one that included some breakout moves in the major indexes. At the same time, Treasurys, one of the best performing assets last year, have finally started to fall apart, sending yields to three-month highs. Read more on U.S. stocks.

Is this a sign of a shift in investor sentiment, which between May and late July was dogged by a fresh and particularly strong bout of pessimism over Europe's financial crisis? It could be.

"The equity markets haven't shot the lights out but they've performed reasonably well," said Paul Nolte, managing director at Dearborn Partners. "It will take some additional time before investors realize they're losing money on bonds," but when upcoming monthly statements show losses, "that could begin to move some people out of bonds into other assets."

Highlighting gains in equities was this week's close by the Standard & Poor's 500 Index (SPX) above the 1,400 level for the first time since May and the Nasdaq Composite Index (COMP) topping 3,000 for the first time in three months. If the Dow Jones Industrial Average (DJIA) ends the week higher, it will be longest string of weekly wins since October.

The yield on Treasury's 10-year note (10_YEAR) , at its highs of the week, was about 0.30 percentage points higher than record low yields reached in July -- at the height of a recent panic over Spanish debt -- as prices dropped. Read more on Friday's bonds action and

Uncertainty over Europe's debt crisis or indications of sluggishness in the U.S. recovery could limit further equity gains. And China still plays a dominant role in swaying investors' views of risk and safety.

On Friday, some of the momentum from a recent rally in cyclical and growth-related assets flagged after a disappointing report on China data. The S&P 500 was off about 3 points at 1,400.

Crude oil fell 0.9% to under $93 a barrel. Still, oil futures (CLU2) are up about 5% since the end of July, while the commodities-sensitive Australian dollar (AUDUSD) recently breached a four-month high.

Riskier assets recently hitting three-month highs include commodities-sensitive Canadian dollar (USDCAD) , and the Thomson Reuters/Jefferies CRB Index (CRY) (CRY) an overall measure of commodities markets.

Also hitting a four-month high was bullish sentiment among investors, according to a survey by the American Association of Individual Investors that measures members who are bullish, bearish and neutral for the next six months.

A better-than-expected U.S. jobs report for July and comments by European Central Bank President Mario Draghi that the ECB will do "whatever it takes" to preserve the region's single currency has helped drive riskier assets higher. But Nolte added that Draghi "kind of stumbled" on that pledge at last week's ECB meeting.

And "lurking in the background" is some moderation in the U.S. housing market, he said.

Stocks have also seen gains as earnings season winds down, said Marc Pado, U.S. market strategist at Dowbull.

"The most basic valuation model would tell you that 1320 (on the S&P 500 Index) was dirt cheap," he said. "That's why after quarterly earnings started coming out and you get a good sense of what the year looks like, you start to see risk appetite rise because people are saying the downside risk is far less than the upside potential as we get through quarter."

Hesitation and rotation

Expect stock investors to be a bit nervous if the S&P 500 approaches its most recent peak of 1420 reached in early April, Pado said. "We have a fiscal cliff that we're heading towards. We've got Europe...plenty of reasons to be more cautious than average and that's reflected in the market trading below the 1570 level. The question is how much do you want to let it slip below that average multiple?"

Support for the market's recent run has come from the hardware and semiconductors in the technology sector, and retail issues, Pado said.

"Parallel with the change in yields have been poorer performance by utilities and consumer staples, which have been safe-haven investments," Nolte added. Now "we're seeing a little bit of a rotation toward more of the economically-sensitive areas of the market, which from a long-term perspective is healthy."

Short term, Nolte said, if the U.S. equity benchmarks can "surpass early-year highs, I think investors will sit up and take notice, and that may spur additional buying."