MarketView for January 26

Summary

The S&P 500 closed at a 29-month high on Wednesday led by gains in tech and commodity shares, as the Street took little notice of the Federal Reserve's lukewarm economic assessment. The Fed said that high unemployment still justifies a $600 billion bond-buying program that has helped equities rally in the last few months. Yet, The S&P 500 continues to show overbought readings in various short-term technical indicators after last week's decline released some selling pressure. Short-term support kicks in at 1,284, its 14-day moving average, while the 1,300 to 1,305 area are closing highs reached in August 2008 and could result in some resistance.

The Dow rose above the psychologically important 12,000 level for the first time since June 2008, but ended slightly lower as the 30-stock average was held in check by Boeing. Boeing ended the day down 3.1 percent to close at $70.02 after the company posted lower quarterly earnings and offered a disappointing guidance.

Trading volume was 8.10 billion shares on the three major exchanges, down from last year's estimated daily average of 8.47 billion shares.

Nonetheless, stronger earnings continued to support further gains in stocks. The technology sector was led higher by network equipment maker Juniper Networks, whose quarterly sales exceeded the expectation consensus. Juniper ended the day up 6.4 percent to close at $37.05.

Commodity shares did well after Allegheny Technologies forecast stronger sales in 2011, helped by higher base prices for metals. Allegheny ended the day up 11.8 percent to close at $65.29. Thomson Reuters' latest data showed 69 percent of the 144 S&P 500 companies that have reported earnings so far have exceeded estimates.

After the closing bell, Qualcomm rose 4.3 percent in after-hours trading to $54.11, the result of the company raising its forecast for 2011 revenue and predicating robust second-quarter revenue. However, Starbucks fell 2 percent to $32.40 in after-hours as the company forecast full-year earnings below expectations due to rising coffee prices.

In the latest economic data, new single-family home sales rose in December to their highest level in eight months. As a result, Hovnanian Enterprises rose 7.6 percent to $4.80.

Fed Cautious

The Federal Reserve indicated on Wednesday that it was in no rush to cut short its rescue of the economy, stating that high unemployment continued to justify its $600 billion bond-buying plan despite continued signs of improvement.

In a statement that was a bit more upbeat than after its meeting in December, the Fed acknowledged for the first time a rise in commodity prices that has fueled global inflation, but signaled it would not throw the central bank off course. The Fed noted that underlying U.S. inflation has been "trending downward," a contrast in tone with other central banks around the world worried about price growth.

"The economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions," the Fed said after a two-day policy meeting. As a result, the Open Market Committee unanimously backed continuation of the Fed's bond purchases, the first time there was no dissent since December 2009.

"Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit," the Fed said.

The unanimous vote suggested a firm consensus to see the bond purchase plan through, even as two known skeptics rotated into voting spots on the central bank's policy panel. Many on the Street thought at least one of the vocal inflation hawks -- Philadelphia Federal Reserve Bank President Charles Plosser or Dallas Fed President Richard Fisher -- would dissent. They didn’t.

The Fed's calm view of price pressures is in sharp contrast to the European Central Bank, whose president has warned that the surge in commodity prices poses an inflation threat. Although headline inflation has picked up in the United States, core inflation has held near a five-decade low.

Inflation is a rising concern in emerging economies around the world. China and India both face increasing public dissent due to inflationary pressures and central banks in Latin America are considering raising rates despite worries about hurting exports.

While the Fed's statement was dovish in the eyes of financial markets, it did offer up a few very modest changes from its last policy announcement in December, acknowledging that the economy has grown stronger.

The Fed said the recovery was insufficient to bring about a "significant" improvement in labor markets, adding the word significant as a nod to the drop in December's jobless rate to 9.4 percent from 9.8 percent the previous month. Its assessment on spending by households and businesses was also mildly upgraded.

"Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward," the central bank said. At best, the language could be seen as a cautious acknowledgment that inflation may have bottomed.

Low levels of inflation outside of food and energy costs had spurred worry at the Fed about a vicious cycle of falling prices and declining spending and investment. However, the brighter economic signs have left Fed officials with room for a bit of error.

Still, officials realize it will take a long time to fill the hole left by the 2007-2009 recession and they have set a high bar for any changes to their bond-buying plan, which markets expect to be completed in full.

New Home Sales Reach 8-Month High

New home sales hit their highest level in eight months during December. However, the gains were driven by a surge in the West in what economists are reluctant to call a sign of the market's recovery. Single-family home sales rose 17.5 percent to a seasonally adjusted 329,000-unit annual rate, the Commerce Department reported on Wednesday.

Even with last month's gain, new-home sales are down 75 percent from their peak of 1.283 million-unit pace in 2005. December's new-home sales received a 71.9 percent gain as a result of sales in the West, data that confounded many who viewed the strength as fleeting.

And in a sign that the housing recovery was still a long way off, report by the Mortgage Bankers Association on Wednesday reported an 8.7 percent drop in applications for new home loans last week. That report by the Mortgage Bankers Association of a fourth straight week of declines in applications for loans to buy homes suggests that housing will remain at depressed levels for the foreseeable future.

Nonetheless, the Commerce Department report was one more piece of data indicating that the economic recovery has strengthened and is broadening. Housing, which was the main trigger of the worst recession since the 1930s, is lagging the broader economy's recovery. Though sales of previously owned homes rose in December, further progress is likely to be frustrated by an overabundance of homes resulting from an unrelenting wave of foreclosures. Those homes, in turn, have been pressuring prices, which have resumed a downward slide and could soon test new lows.

What is confusing is the sharp rise in new-home sales in the West, given that the region has suffered the highest rate of foreclosures. The availability of cut-rate distressed properties would normally draw strength away from the new-homes market. One theory is that the Western sales increase, which was also ravaged by December floods, could have been the result of buyers rushing to take advantage of a statewide homebuyer tax credit.

With the spike in sales nationally, the supply of new homes on the market fell to 6.9 months' worth, the lowest since April, from 8.4 months' worth in November. The median sales price for a new home increased 12.1 percent last month from November to $241,500, the highest since April 2008. Compared with December last year, the median price rose 8.5 percent, the biggest increase since August. Economists cautioned against reading too much into the rise in prices, saying the gains were tied to the surge in sales in the West.