Getty Images SAN FRANCISCO (MarketWatch) — Stocks ended a big volume week with gains and a dose of stability. The next week's rush of consumer news, plus testimony from Janet Yellen and earnings from Cisco Systems Inc., will help determine whether that recovery is for real.
After a tough January, the worst month in over a year, stocks spent the first week of February in see-saw trade. Ultimately the bulls won out, and by Friday, some strategists were saying the correction was behind us.
/quotes/zigman/627449/realtime DJIA 15,794.08, +165.55, +1.06% Dow average over 5 days
The Dow Jones Industrial Average (DJIA) snapped a two-week losing streak to finish up 0.6%. Along the way, it posted three days of triple-digit moves, including Monday's 326-point loss. The S&P 500 Index (SPX) broke a three-week losing streak, finishing the week up 0.8%, and the Nasdaq Composite Index (COMP) answered two weeks of losses by closing the week up 0.5%.
Volume was tremendous, at least by recent weak standards. For NYSE-listed stocks, average daily volume of 4 billion resulted in the largest average weekly volume since May 2012. For Nasdaq-listed stocks, it was the biggest volume week since October 2011.
Positive sentiment—or simply bargain-hunting—won the day. Investors appeared to look on the brighter side of the Friday jobs report, focusing on the slight decline in the unemployment rate and higher labor force participation rate rather than the top-line jobs number, causing some analysts to maintain the recent correction in stock prices has run its course. But as of Friday evening, most MarketWatch readers participating in a poll said the late-week comeback was a dead-cat bounce.
Even with last week's gains, the Dow is down 4.7% since the beginning of the year, with the S&P 500 off 2.8%, and the Nasdaq is down 1.2%. Declines off the recent highs don't meet a common definition of a correction, that is, a 10% fall from a near-by peak. But they're the kind of healthy pause many like to see.
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"Humans tend to get hung up on round numbers; hence the call for a 10% correct," said Dan Greenhaus, chief global strategist at BTIG. "But in reality, 10% corrections are somewhat infrequent, whereas corrections of 5% to 8% are quite normal."
While the recent emerging-markets situation may have spooked stocks into an adjustment, earnings season has gone pretty well considering the amount of fretting about company fundamentals from investors.
Both earnings growth and revenue improved in the past week, according to John Butters, senior earnings analyst at FactSet. The blended earnings growth rate rose to 8.1% from the 7.8% rate in the previous week, up from the projected rate of 6.3% at the start of the year. The improvement came from consumer discretionary companies and the insurance industry last week. Similarly, the blended revenue growth rate is at 0.8%, whereas expectations at the start of the year were growth of 0.3%, with technology and health-care firms leading growth, according to FactSet data.
If earnings as a whole were disappointing this season, there would have done much more damage. Greenhaus characterized the recent pullback in stocks as a "normal correction" unless some large negative catalyst sparks another selloff.
What's also healthy about the recent pullback is that it's reconditioning investors to get used to such adjustments following 2013's 30% market gain, said Brad McMillan, chief investment officer for Commonwealth Financial.
What will follow is an adjustment period, but don't expect stocks to return to their previous highs anytime soon. Recovery will be slow, McMillan said, noting it will likely be "weeks to months" before we see a return to previous highs.
For the week ending Feb. 5, investors pulled a record weekly amount out of U.S. stock funds with about 95% coming out of exchange-traded funds, according to Citi Research.
It's those outflows that indicate a bottoming in the market correction from January highs, according to a recent note from Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch.
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