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Adam in @Barrons: Stock Market Reverses to 1.4% Gain

January 23, 2016
Stocks finished more than 1% higher last week, but not before investors were treated to the market’s version of the Coney Island Cyclone, a ride equal parts thrilling and frightening. The scary nadir was reached Wednesday, when the two major broad indexes fell three-quarters of the way to a bear market, down about 15% from last May’s all- time highs.On the week, the market dropped 4% before turning and soaring higher, finishing up better than 5% from the low. The violent moves were driven by similarly volatile oil prices, which hit a low Wednesday but finished up 9% on the week to $32.16 per barrel, up 21% from lows. Traders scrambled to cover their short positions.

Last week, the Dow Jones Industrial Average gained 105 points or 0.7%, to 16,093.51, and the Standard & Poor’s 500 index rose 1.4%, or 27, to 1906.90. The Nasdaq picked up 2.3%, to 4591.18
Energy stocks jumped 2%. While the oil market ruled the day, equities also were boosted by comments about further stimulative central bank measures from officials in Europe and Japan last week. In the background, fears lurk about global growth, despite a decent 6.8% fourth quarter China GDP growth number released last week. Though a bit less than expected, it was much better than investors’ worst fears. Nevertheless, it was the lowest in a quarter century.
“There was a coiled spring of short positions” that were released in the upsurge, says Michael Purves, chief global strategist at Weeden. The oil bounce was particularly interesting as it occurred against a challenging backdrop of a rising dollar and news of rising U.S. crude supplies.
The oil rally is interesting from a historical view, as well. Two of the last three times crude prices closed up at least 9% on the week happened within the same week as a bottom in the stock market, in March 2009, and August 2015, according to WSJ Market Data Group.
Nevertheless, Adam Sarhan, CEO of Sarhan Capital, views last week’s recovery as just a relief rally from much oversold levels. Indeed, on Thursday, according to Bespoke Investment Group, the S&P 500 index had closed two standard deviations below its 50-day moving average for 11 straight days. Such a streak is rare, and the last one that long was October 2008, and before that September 2001.
Sarhan expects the broad stock indexes to enter a bear market and join many subgroups of stocks—commodity, small caps, banks, among others—already there. The market put in a “near term low” Wednesday, he says, but not “the low.”
Big violent rallies are par for the course in bear markets, not in bull markets, he adds. The market has not had a good time of it going right back to when the Federal Reserve ended its quantitative easing program in October 2014. The biggest driver of the bull was its easy monetary policy.
No moves are expected, but investors will be paying close attention this Tuesday and Wednesday, when the Federal Open Market Committee meets.