Indices Hit Milestones on Confidence

The Dow closed above 13,000 for the first time since May 2008 this week, and the S&P 500 also hit a milestone of its own, as buoyant U.S. consumer confidence data and a sharp drop in oil prices pushed the nearly five-month rally forward.

The S&P 500 closed above 1,370, its May 2011 intraday high, a move that could invite momentum buying as money managers chase performance, though low volumes lately have raised concerns about the rally's longevity.

"I don't see anything technically favoring a downturn right now," stated Chris Burba, short-term market technician at Standard & Poor's in New York.

"No doubt (the market) has been overbought since the beginning of February, but in a powerful uptrend, price will continue higher for some time amid overbought conditions."

Technology shares ranked among the best performers, and the Nasdaq was trading at its highest since 2000. Micron Technology Inc. (NSQ:MU) shot up 3.7 percent to $8.88 after Intel Corp said it will sell its stake in two wafer factories to Micron and buy chips from the company.

Intel advanced 1.3 percent to $27.24. The PHLX semiconductor index <.SOX> rose 1.6 percent.

The Dow Jones industrial average (DJI:DJI) gained 23.61 points, or 0.18 percent, to close at 13,005.12. The Standard & Poor's 500 Index (MXP:SPX) rose 4.59 points, or 0.34 percent, to end at 1,372.18. The Nasdaq Composite Index climbed 20.60 points, or 0.69 percent, to finish at 2,986.76.

The S&P 500 is up about 9 percent since the start of the year, largely because of data showing stronger momentum in the economy and signs of progress in managing the euro zone's debt crisis, including a debt deal for Greece.

Consumer confidence in the world's largest economy jumped to a one-year high in February, according to a report from The Conference Board, a private business research group. This indicator is noted because consumer spending accounts for more than two-thirds of U.S. economic activity.

The drop in oil prices from recent highs also relieved worries about the outlook for consumer spending. Brent crude oil futures fell more than $2 to settle at $121.55 a barrel.

Fourth-quarter earnings have been less impressive than in recent quarters, however, with 63 percent of companies beating analysts' expectations, below the average 70 percent beat rate in the last four quarters. Results are in so far for 472 of the S&P 500 components.

Advancing stocks outpaced decliners on the NYSE by about 15 to 14, while on the Nasdaq, decliners beat advancers by about 13 to 12.

Economy Grew Faster at End of 2011

Economic growth was stronger than originally thought at the end of 2011 as consumers increased their spending and businesses stocked up their inventories.

Gross domestic product, the broadest measure of the nation's economy, grew at a 3% annual rate in the fourth quarter of 2011, the Commerce Department said Wednesday.

The government had initially said the economy grew at a 2.8% rate. The Commerce Department estimates the GDP figures three times, and Wednesday's report was its second estimate.

That's a major improvement from a 1.8% growth rate in the prior quarter, and the fastest growth since the second quarter of 2010.

"We are seeing what historically would be considered a healthy growth rate for the country," said Brian Hamilton, CEO of Sageworks, a financial information company. "Last quarter compares very favorably to the GDP growth rate over the past few years and indicates the country continues to recover from the recession."

Consumer spending picked up at an annual rate of 2.1% in the fourth quarter, slightly higher than originally reported. Spending on long-lasting goods, especially motor vehicles, helped drive GDP higher, as did increased spending at restaurants and hotels.

Meanwhile, businesses increased their inventories by $54.3 billion, after cutting back on their stock the prior two quarters.

A boost on that front can be seen as a double-edged sword. On one hand, it can be a sign of confidence in the economy. When firms predict greater purchases in the future, they build up their inventories. On the other hand, if consumers don't end up buying as much as firms had hoped, that could drag on GDP going forward.

Most economists are predicting U.S. economic growth slowed slightly in the first quarter, for this very reason.

Many Investors Still Flock to Bonds

Despite a bull-market surge over the past four months, many retail investors continue to shun stocks, missing out on one of the biggest rallies in years.

Bond funds over the past four weeks have taken in a staggering seven times as much money as equity funds, continuing a pattern that has held steady since the cycle run began, according to TrimTabs data.

Yet stocks have produced four times the return as their fixed-income counterparts in 2012, even as mom-and-pop investors have stayed on the sidelines and continued to look for safe-haven bets while shunning risk.

"Retail investors still think about 2008. People are not convinced we're in a stock market rally," Nadav Baum, executive vice president at BPU Investment Management in Pittsburgh, Pa., says in reference to the darkest days of the financial crisis.

Like many in his profession, Baum worries that most investors won't get back into the market until the indexes climb to an even higher peak - perhaps the Dow industrials at a record 14,500, he suggests.

"2008 is still very fresh," Baum says. "There's still a lot of geopolitical issues. They're still not convinced that the Greece and Italy things are done yet. None of these things have changed from last year. That's why you're still getting all these flows into the fixed-income side. That's the safe haven, not the equity side."

Bond mutual funds have attracted $30.4 billion over the past month even as they have returned just 2.8 percent this year.

While both investment grade and high-yield bonds both have posted record issuance in recent weeks, low-yielding Treasurys remain the preference, drawing in about double the assets of corporates over the past three months, according to TrimTabs. Corporates, however, have drawn about even with Treasurys over the past month.

For Kevin Ferry, president of Cronus Futures Management, a bond-trading firm in Chicago, the fund flows are sending an even more ominous message: That the rush to government securities is leading to "the secular end of a 30-year bull market in bonds."

"It scares the hell out of me," he says. "The baby boomers are the biggest lemmings around. They're buying into the concept of financial repression."

As a trader, Ferry says he's been buying futures contracts on the 10-year Treasurys solely for short-term trading positions. Anyone who's looking at the government bonds as a long-term money store, he says, instead should be focusing on what bigger buyers are doing.

"What is the smart money doing? What are the long-term holders of Treasury securities over the last 20 years - Japan, China, Russia - doing? They're diversifying away from them," Ferry says. "They're valueless pieces of paper. They're capital appreciation notes. Everyone who buys them predicates it on a predetermined scenario: That I'll get out before it goes wrong."

The worry with Treasurys is two-fold: The Federal Reserve is keeping rates artificially low and likely will for at least the next two years, while the specter of inflation ahead will outweigh the value of fixed-income investments.

Yet stock market investors also face the same worry over what happens once the Fed starts pulling its bond-buying stimulus programs, which simultaneously have kept rates low while pushing investors towards stocks and commodities.

TrimTabs CEO Charles Biderman says fear of what happens after quantitative easing and other interventions run their course is what could be keeping retail investors from hopping aboard the stock market train.

Curiously, investor surveys, such as the one run by the American Association of Individual Investors, have reflected strongly bullish sentiment for going on nine straight weeks. But investors haven't been backing that up with their dollars.

In addition to parking their money in bonds, individuals have plowed $2.3 trillion into savings accounts over the past five years, which is 2.4 times the amount allocated to bonds.

"The bulls dancing to the central bank's music had better stay close to the door so they can exit quickly when their medicine becomes poison and the music stops," Biderman said in his weekly analysis. "While central bankers can print all the money they want, they cannot control where the money goes."

Mortgage Applications Jump

Applications for home mortgage purchases jumped last week as interest rates dipped, though demand for refinancing waned.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, dipped 0.3 percent in the week ended Feb 24.

The MBA's seasonally adjusted index of refinancing applications was off 2.2 percent, but the gauge of loan requests for home purchases shot up 8.2 percent.

"Purchase application volume increased over the week, but remains within the narrow and anemic range of activity we have seen since the expiration of the homebuyer tax credit in May 2010," Michael Fratantoni, vice president of research and economics at the MBA, said in a statement.

The refinance share of total mortgage activity slipped to 77.9 percent of applications from 80.1 percent.

Fixed 30-year mortgage rates averaged 4.07 percent, down 2 basis points from 4.09 percent the week before.

The survey covers over 75 percent of U.S. retail residential mortgage applications, according to MBA.

Mortgage Applications Jump

Applications for home mortgage purchases jumped last week as interest rates dipped, though demand for refinancing waned.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, dipped 0.3 percent in the week ended Feb 24.

The MBA's seasonally adjusted index of refinancing applications was off 2.2 percent, but the gauge of loan requests for home purchases shot up 8.2 percent.

"Purchase application volume increased over the week, but remains within the narrow and anemic range of activity we have seen since the expiration of the homebuyer tax credit in May 2010," Michael Fratantoni, vice president of research and economics at the MBA, said in a statement.

The refinance share of total mortgage activity slipped to 77.9 percent of applications from 80.1 percent.

Fixed 30-year mortgage rates averaged 4.07 percent, down 2 basis points from 4.09 percent the week before.

The survey covers over 75 percent of U.S. retail residential mortgage applications, according to MBA.