Fed Chief Ben Bernanke when it came to whether the Fed was going to be able to provide additional “help” to keep the economic expansion going. Given the large decline once he began speaking, investors figured the Fed was out of bullets. Hoping for another “quantitative easing” to help alleviate all that ails the economy, investors reacted to his testimony indicating that Fed members were still very concerned about not only the lack of improvement in the US economy, but the implications for a slowing international environment. Specifically, Bernanke said that he believes that right now the outlook remains “unusually uncertain.” Little more could be said about housing, from a very poor showing by homebuilders to modestly better data on existing home sales (likely boosted by the ending of government support). Better data from Europe and continued “better than expected” earnings were enough to push markets higher on the week and after a poor last week, you have to ask yourself – do you feel lucky?

The better than expected earnings and good economic data from Europe (ours remains merely OK) put investors in a happy mood and pushed the averages above their mid-July peak, effectively breaking the stair step pattern discussed last week. As much as I would like to get excited about the markets, a move above the 1120 area would set the stage for a rally toward 1200, while a stall at 1120 could set up another round of backing and filling toward the lower end of the recent range (roughly 1050). There is a bit of good news for seeing a continuation to the rally, as many of our longer-term indicators have turned higher from low levels. Different than the daily net number of advancing stocks, I also look at the net number on a weekly basis and that is at a new high (the daily not yet), indicating that with all the daily volatility, on a week to week basis more stocks are rising than falling. The bits of good news doesn’t mean straight up or for that matter that stocks will behave better, but it is possible to see a more positive bias over the next few weeks.

Yields hit their low for the week just after Fed Chief Bernanke indicated that the economy remained unusually uncertain (as opposed to usually certain?), however by the end of the week declined a bit as the equity markets took center stage. The big question from the testimony to Congress was whether the Fed could do anything more to spur economic activity. While Bernanke indicated that there was, many believe they are at the end of their rope – and all that is left is hope. At the end of the day, interest rates are not likely to be rising anytime soon, as overall economic growth will be muted for quite some time – until the debt overhang can be cleared and economic activity can return to “normal”. Unfortunately that is likely to be a few years rather than a few months or quarters away.

The market move of last week put not only the utility averages near the top but too the telecom sector, both of which had been trolling the bottom of the pile since the markets put in their “big” bottom in ’09. Also of note was the moving down of the SP500 group over the past few weeks relative to all the groups, which means that the rally is encompassing much more than the largest stocks. Finally, before getting to the underlying sectors, it should be noted that along with the SP500 moving above (just barely) the average of the past 200 days, so did small cap, emerging markets and REITs, an indication that just maybe the corrective move from the April highs has run its course. While the basic material sector was clearly the star of the week, moving up over 8%, with many of the sub-sectors jumping more than 10%. Word that Europe’s industrial picture may not be so bleak spurred the group and if “sustainable” gets reintroduced to investor’s lexicon, the sector could once again lead stocks higher. Finally, the group that everyone loves to hate – housing – remains near the bottom and showing little overall strength. Housing weakness has also hurt the home repair retail stocks, as Home Depot (HD) and Lowe’s (LOW) have dramatically under performed the market since the April highs.

The equity outlook may have brightened some given the strong week, however another hurdle needs to be cleared at roughly 1120 on the SP500. We may step gingerly back into equities as the week unwinds, unless trading once again gets ugly. Given the now weaker dollar, international may once again prove profitable. Bond investors should be buying 7-10 year maturities for income as well as some appreciation as rates may not yet have bottomed.

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.