MarketView for March 17

Summary 

Wall Street rebounded on Thursday, after three days of losses but the advance could be temporary as concerns about Japan's nuclear crisis continued unabated. The S&P 500 .recovered somewhat after giving up the year's gains on Wednesday, but options activity showed traders are increasing hedges against another decline in stocks.

The recent losses brought out investors looking for bargains. However, volume remained lackluster, with just 7.95 billion shares trading on the major exchanges, well below last year's daily average of 8.47 billion and down sharply from Wednesday's record for the year of 11.1 billion shares traded.

If the market is to refocus on fundamentals, more news from bellwethers like FedEx will help. FedEx forecast improved revenue on strong demand, lifting shares 3.1 percent to $87.89.

At the close, a total of about 1.23 million option contracts changed hands in the S&P 500 as puts outpaced calls by a factor of 2.17:1, according to options analytics firm Trade Alert. The recent average put-to-call ratio is 1.93. An index put option conveys the right to sell an index at a certain level.

However, the S&P 500 is down 2.3 percent for the week so far. Stocks' recent declines followed a rally of nearly six months. The rally in itself has prompted predictions of a market correction. Adding to that idea is the fact that the CBOE Volatility Index VIX .VIX, Wall Street's fear gauge, fell 10.3 percent to 26.37 as stocks rose, but the VIX was still high compared with the recent average of about 20.

The market could see greater volatility on Friday as the two-day quadruple witching period ends. Quadruple witching is the expiration and settlement of March stock index futures, single-stock futures, equity options and stock index options.

On Thursday, natural resource stocks helped lead the market as commodity prices rebounded. Tensions in the Middle East and North Africa drove oil prices up sharply. Brent crude for May delivery gained $4.40 to $115.00 a barrel. Chevron gained 2.7 percent to $102.24. The S&P energy index rose 3.1 percent to be the leading sector, even though the prospect of higher fuel costs have reduced the enthusiasm  investors have for the markets.

Economic Data Still Points to Growth

Consumer prices increased at their fastest pace in more than 1-1/2 years in February although inflation pressures remained generally contained. In addition there were positive signs for the economy from data released on Thursday that included claims for new unemployment benefits, which fell last week, and factory activity in the country's Mid-Atlantic region, which expanded at its quickest rate in 27 years.

The reports were an encouraging sign for the Fed whose massive efforts to stimulate growth through government bond purchases were aimed both at decreasing unemployment and preventing prices from falling.

The same time, the Fed, which wants to ensure that the average consumer believes that inflation is not an issue, said on Tuesday it was watching inflation and expectations for future prices closely, but that the upward price pressure from commodities should be temporary. While the Fed does see inflation expectations as anchored, consumers feeling the pinch of high energy and food costs think inflation will likely worsen.

Large gains in food and energy costs have propelled inflation sharply higher over the past three months. In February, the Consumer Price Index rose 0.5 percent, the largest increase since June 2009, the Labor Department said. Energy prices last month rose 3.4 percent after increasing 2.1 percent in January, while food prices increased 0.6 percent, the largest gain since September 2008.

Other prices, however, have been largely muted and the core CPI -- excluding food and energy -- rose just 0.2 percent, suggesting surging commodity costs had yet to generate a broad inflation that would spur the Fed into action.

For now, the economy appears to be weathering the high energy costs, although analysts remain wary of the effects of Japan's devastating earthquake and tsunami. Initial claims for state unemployment benefits fell 16,000 to 385,000 last week, the Labor Department said in another report, with the four-week moving average hitting its lowest since mid-July 2008. The data covered the survey period for the government's closely tracked employment report for March.

Companies appear to be taking the high energy prices and the devastation in Japan in stride. FedEx forecast improved revenue and margins in the current quarter and beyond. It said it saw more shipments for reconstruction in Japan. The outlook from FedEx helped stocks bounce back from three days of selling, pulling the Standard & Poor's 500 index back into positive territory for the year.

Prices for U.S. government debt fell as investors skimmed profits off a safe-haven rally this week. The dollar eased off record lows against the yen amid fears Japanese authorities might intervene to curb the currency's rapid ascent.

In another sign the economy was strengthening, the Philadelphia Federal Reserve Bank's business conditions index rose to 43.4 in March -- the highest since January 1984 -- from 35.9 in February.

A separate report from the Fed showed industrial output slipped 0.1 percent in February, pulled down by a 4.5 percent plunge in utility production. Manufacturing output, however, rose 0.4 percent, showing the sector was still helping to drive the economy's recovery.