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[DewDiligence]

Market Rally Rolls On

[The big news today was the surprising 22% jump in seasonally-adjusted housing starts in Feb 2009 vs Feb 2008. This figure will probably turn out to be an outlier, but it’s a psychological boost that year-over-year housing starts are up to any degree.]

http://online.wsj.com/article/SB123728885950354167.html

›MARCH 17, 2009, 5:57 P.M. ET
By PETER A. MCKAY, ROB CURRAN and GEOFFREY ROGOW

Stocks jumped, closing at their highs for the session after a glimmer of hope from the housing market helped continue the resurgence of beaten-down banking and consumer stocks and tech stocks jumped.

The Dow Jones Industrial Average rose 178.73 points, or 2.5%, to end trade at 7395.70, the highest close since Feb. 19. The average has now climbed in five of the last six trading sessions, is up 4.7% this month, and up 13% from its 12-year closing low of 6547.05 hit on March 9.

The S&P 500 Index jumped 24.23 points, or 3.2%, to 778.12, also its highest close since Feb. 19. The Nasdaq Composite Index leapt by 58.09 points, or 4.1%, to 1462.11, the highest close since Feb. 18, as Google, Cisco Systems and Research In Motion bounced.

"With each round of gains that we see, the odds are increasing that we've seen the bear-market lows," said Wachovia Securities strategist Al Goldman, who said he tweaked his advice to clients last week, advising them to become more aggressive and even buy into rallies if necessary.

Leslie Barbagallo, executive vice president of SunGard Trading in New York, said recent activity in the options markets suggests that institutional investors have been coming back to stocks after a period in which volumes had waned.

"The question of whether it's a good thing or a bad thing to have the institutions back is a separate matter," said Ms. Barbagallo, alluding to the volatility hedge funds and other large investors caused late last year. But increased participation by some of the market's smartest players could signal the gains will continue.

Structurally, the rally is encouraging because the gains are gradual and holding steady, said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. But he said Schaeffer's is skeptical because sentiment has changed too quickly.

Financial stocks helped lead the rally, with the S&P 500's financial sector jumping 6.5% as banks including Citigroup, U.S. Bancorp and SunTrust Banks rose. Financials led the broader market off its bear-market lows last week as a number of banks said the first two months of the year had been profitable.

Sean Simko, head of SEI Fixed Income Management, said that fixed-income spreads have tightened in particular areas, with some of the unwind of money in credit being put into bank stocks. Still, a flood of cash from Treasurys into equities, which would drive even more banking gains, is unlikely in the short term as traders await clarity from the Federal Reserve.

The Fed, which begins a two-day policy meeting on Tuesday, isn't expected to alter interest rates. Investors will be listening for hints that the central bank will buy long-term Treasurys, though expectations that the central bank will adopt a policy of "quantitative easing" have recently been fading. Treasurys dropped as stocks rose on Tuesday; the 10-year yield rose to about 3.01%.

Investors say that they'd need to start seeing economic trends improve before buying stocks with any conviction, especially when it comes to banks. "Though we're seeing pieces of light at the end of the tunnel with the bank disclosures in the past week, we're nowhere near out of this yet," said Mr. Simko.

Consumer-discretionary stocks climbed 4.8% after data showed housing starts jumped 22.2% in February. Building permits also rose. The PHLX Housing Sector Index jumped 5.7%. Home Depot shares jumped 6.7% and Wal-Mart Stores gained 2.5%.

Anthony Conroy, head trader at BNY ConvergEx, said the most important development of the day for traders was the report on housing starts. "There are some signs of life in the housing market, which is very important because that's the epicenter of a lot of the problems the market has," said Mr. Conroy.

Harry Strunk, managing director at Treflie Capital Management, which tracks shorts, said such participants remain on the defensive for now. He estimated that the typical short portfolio rose about 10% in the first two months of the year, but bearish fund managers have been taking money off the table since.

Etc.‹