MarketView for February 8

Summary

The Nasdaq composite stock index ended the day on Friday at a 12-year high and the S&P 500 index at a five-year high, partially due to by gains in technology shares and stronger overseas trade figures. The S&P 500 also posted a sixth straight week of gains for the first time since August.

The technology sector led the day's gains, with the S&P 500 technology index up 1.0 percent. Both LinkedIn and AOL saw their shares gain after they reported quarterly results. LinkedIn rose 21.3 percent to $150.48 after announcing strong quarterly earnings and gave a bullish forecast for the year. AOL ended the day up 7.4 percent to close at $33.72 after the online company reported higher quarterly earnings, partially because of a 13 percent rise in advertising sales.

The U.S. trade deficit declined in December, suggesting that our economy likely grew in the fourth quarter instead of contracting slightly as originally reported. Data indicated the trade deficit shrank in December to $38.5 billion, its narrowest in nearly three years, indicating the economy did much better in the fourth quarter than initially estimated.

Trading volume on Friday was below average for the week as a blizzard swept into the northeastern United States.

The financial markets have posted strong gains since the start of the year, with the S&P 500 up 6.4 percent since December 31. The advance has slowed in recent days, with fourth-quarter earnings winding down and few incentives to continue the rally on the horizon.

For the week, the Dow was down 0.1 percent, the S&P 500 was up 0.3 percent and the Nasdaq was up 0.5 percent.

Shares of Dell ended the day at $13.63, up 0.7 percent, after briefly trading above a buyout offering price of $13.65 during the session. Dell's largest independent shareholder, Southeastern Asset Management, said it plans to oppose the buyout of the personal computer maker, setting up a battle for founder Michael Dell.

Signs of economic strength overseas buoyed sentiment on Wall Street. Chinese exports grew more than expected in January, while imports climbed 28.8 percent, highlighting robust domestic demand. German data showed a 2012 surplus that was the nation's second highest in more than 60 years, an indication of the underlying strength of Europe's biggest economy.

For the most part, earnings have been stronger than expected since the start of the reporting period. Fourth-quarter earnings for S&P 500 companies now are estimated up 5.2 percent versus a year ago, according to Thomson Reuters data. That contrasts with a 1.9 percent growth forecast at the start of the earnings season.

Molina Healthcare rose 10.4 percent to end the day at $31.88

The CBOE Volatility index was down 3.6 percent at 13.02. The gauge, a key measure of market expectations of short-term volatility, generally moves inversely to the S&P 500.

A total of approximately 5.6 billion shares changed hands on the three major equity exchanges, as compared to the 2012 average volume of about 6.45 billion shares.

Looking Ahead

The stock market is no stranger to strong performances in January, only to see the lofty gains early in the year transition into months of grinding action that goes nowhere. That is what happened in 2011 and 2012, and could be what happens in 2013. Markets are up this year in the face of Washington's debates over fiscal policy, but a looming deadline on spending reductions could test the gains.

Major indexes recently crossed psychologically important milestones - 1,500 for the S&P 500 and 14,000 for the Dow industrials. The S&P is at its highest level in five years, while the Nasdaq finished on Friday at its highest close since November 2000, the tail end of the Internet bubble. Moreover, those numbers are more significant than Wall Street's usual fixation on round numbers. This is only the second time the Dow has reached 14,000, and the third time the S&P has hit 1,500.

That could leave the market churning as investors test whether there's enough support to reach new highs, or if a pullback is needed. The sharp gains and overall bullishness on Wall Street leave stocks vulnerable to sudden shocks, such as a flare-up of the financial crisis in the euro zone, which momentarily sidetracked the market earlier this week.

One significant hurdle is the automatic federal spending cuts that will go into effect as of March. So far, the equity market has largely ignored the back-and-forth related to delaying the so-called sequester that would trigger $85 billion in automatic spending cuts, which would hit the defense industry particularly hard.

If the cuts go ahead unchanged, that could slow economic growth this year due to the swiftness of the cuts, according to the Congressional Budget Office. While that's not as dire as the immediate threat of default presented by a possible failure to raise the debt ceiling, it isn't positive for markets.

However, the markets could be ignoring the political deal making because the spending cuts would go towards reducing the United States' high debt level. The CBO report, which included the cuts as they are, forecast the budget deficit will drop below $1 trillion a year after four years above that level.

The key question is what are the implications of slower growth? The economy already unexpectedly contracted in the fourth quarter of last year, but more recent data suggests subsequent revisions will show the economy did in fact grow, albeit at a weak pace.

The future path of monetary policy will be in focus next week as several members of the Federal Reserve are scheduled to speak on the economy and policy. The central bank is currently buying $85 billion worth of assets a month as it tries to bolster the economy.

A growing number of policymakers say the Fed should taper its bond-buying when the time is right rather than bring the stimulus to an abrupt end and investors will be looking for signs of what the central bank's exit strategy may be.

Meanwhile, there is a cheering section that believes the S&P 500 index will make a run for the all-time high of 1,576. At the same time, the Street is currently taking the market's sideways direction as a healthy move as it tries to establish a stronger base to push higher.