Weekly Recap - Week ending 20-Mar-09

Following its largest weekly gain in many months, the stock market managed to extend those gains in the beginning of this week, culminating with a sharp spike higher Wednesday afternoon after the Federal Reserve surprisingly increased its balance sheet. However, investors have taken profits over the last two sessions, resulting in only modest gains for the major averages this week -- S&P +1.6%, Dow +0.8%, Nasdaq +1.8%, Russell +1.8%.

Looking at sectors, Utilities led the way with an 8% advance, while Financials gave up their weekly gains on Thursday and Friday, losing 8% and 5%, respectively, to close nearly unchanged.

Financials helped the market begin the week on positive note. UK banks led the way after Barclays (BCS +19%) announced it is shopping its iShares ETF business. However, the overall market saw profit taking in the afternoon, closing modestly in negative territory.

The first big piece of economic data was also released on Monday, as Industrial Production showed a slightly larger-than-expected decline of 1.4% in February (consensus -1.3%), while the prior month was revised slightly lower to -1.9% from -1.8%.

But Tuesday the market resumed its upward trend, albeit in choppy trade, with gains across the board. Financials once again were a key determinant in the direction of the broader market, but they weren't the only source of strength as the Nasdaq's 4.1% advance was the biggest among the major averages, led by large-cap technology shares, while the Russell 2000 Small-Cap Index outperformed all others, rallying 4.6%.

It was a big day for economic data as well, as Housing Starts and Building Permits both showed large, unexpected jumps in February. Starts increased 22.2% month-over-month to 583,000 (consensus 450,000), while Permits increased 3% to 547,000 (consensus 500,000). The primary swing factor for Starts was the increase in multi-unit structures. Specifically, Starts on dwellings with five units or more surged 80% to 212,000 units, while single-family Starts rose just 1.1% to 357,000 units. Nevertheless, the February report was better-than-feared economic news and could factor favorably in revised forecasts for Q1 GDP.

Wednesday proved to be the biggest day of the week, though very little happened until the Federal Open Market Committee (FOMC) rate decision and policy statement at 14:15ET. The FOMC announced the decision to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.

The Treasury purchase sent the bond market rocketing higher, with the 30-year bond up more than 6 points at one point. The stock market followed suit, and a plunge in the dollar sent precious metals sharply higher.

While definitely overshadowed, there was also inflation data released on Tuesday and Wednesday. First was the Producer Price Index (PPI) on Tuesday. The core rate, which excludes food and energy, continued to defy the weak demand that is undoubtedly pressuring producers by advancing a larger-than-expected 0.2% (consensus 0.1%). Total PPI was up a smaller-than-expected 0.1% (consensus 0.4%). Next came the Consumer Price Index (CPI) on Wednesday. Both readings came in hotter-than-expected, with the core rate up 0.2% (consensus 0.1%) and total up 0.4% (consensus 0.3%).

The profit taking began on Thursday, despite commodities and commodity-related stocks soaring on the weaker dollar following the Federal Reserves announcement the previous day -- Energy +1.4%, Materials +1.4%. Two factors came into play for the expected weakness. The first was the understanding that the market was apt to encounter some profit taking after gaining as much as 20% between its low on March 6 and its high on March 18. The second was the recognition that the rally had left the S&P testing its 50-day simple moving average (now at 800), which has provided stern resistance during prior rebound attempts.

The market followed through to the downside on Friday. It was a slow session, despite the quadruple-witching options expiration, with the move lower broad-based and not related to any specific headline.

Things should pick up next week, with a number of notable pieces of economic data and some key testimony on tap. Looking at the economic calendar, Existing Home Sales are out Monday (3/23) morning, while Durable Goods Orders and New Homes Sales are out Wednesday (3/25). Looking at the Fed/Treasury calendar, Chairman Bernanke and Secretary Geithner testify before the House Financial Services Committee on Tuesday (3/24) on the government's rescue of AIG, while Mr. Geithner goes before the committee again on Thursday (3/26), this time on financial market regulation.

--David M Campione, CFA, Briefing.com

Index	Started Week	Ended Week	Change	% Change	YTD %
DJIA	7223.98	7278.38	54.40	0.8	-17.1
Nasdaq	1431.50	1457.27	25.77	1.8	-7.6
S&P 500	756.55	768.54	11.99	1.6	-14.9
Russell 2000	393.09	400.11	7.02	1.8	-19.9