PULLBACK IN OIL CONTRIBUTES TO STOCK RALLY -- BUT HAWKISH FED MAY LIMIT UPSIDE POTENTIAL

STOCKS HAVE VERY STRONG WEEK... Major U.S. stock indexes registered their strongest week since November 2020.   And they also broke through some initial resistance levels.   The week's strong action signals that stocks have put in a short-term bottom and may continue to gain some ground.  Their longer-range direction, however, still remains uncertain.   But first the good news.   Chart 1 shows the Dow Industrials rising to the highest level in a month on rising volume.  The Dow also rose above its 50-day average and is on the verge of testing its 200-day line.  Chart 2 shows a similar rally in the S&P 500.  The SPX has also risen above a falling trendline drawn over its January/February highs.   Although the Nasdaq was the week's biggest percentage gainer, it's rally started from a lower level.  As a result, Chart 3 shows the Nasdaq Composite Index also rising to the lowest level in a month but still below its moving average lines.

Ten of eleven market sectors also gained on the week with consumer discretionary, technology, financials, and  healthcare leading the market higher.  Energy was the only loser owing to a pullback in the price of oil.   And that pullback probably contributed to the week's strong stock rally.

CRUDE OIL LOSES GROUND WITH OTHER COMMODITIES... The inflationary spiral caused largely by rising commodity prices, and oil in particular, has been one of the contributing factors to the decline in stock prices during the first quarter.    So it stands to reason that this week's pullback in commodity markets probably contributed to stock buying.  Chart 4 West Texas Crude oil pulling back sharply over the last week and falling all the way to its 50-day moving average.  Chart 5 shows a similar setback in the S&P GSCI Commodity Index.   What commodity prices do from here will have a big influence on the direction of stocks.   So will a more hawkish Fed.

FED TURNS MORE HAWKISH... The Fed announced a quarter point rate hike on Wednesday which was widely expected.   What may have been a surprise was its stated intention to raise short-term rates six more times this year, and four more next year.   Some Fed members this week even called for a half point rise at the next meeting.    That's the most hawkish the Fed has sounded in a long time.   Bond yields rose as a result with even bigger gains in short-term rates which led to a flattening of the yield curve.  Some parts of the yield curve also inverted which is usually a caution sign for stocks and the economy.  The weekly bars in Chart 6 show the 10-Year Treasury yield jumping to the highest level since 2019.   Stocks reacted positively to this week's rate hike.   A more aggressive Fed, however, may limit upside potential in stocks.   No doubt the Fed will also be closely monitoring the direction of commodity prices and inflation.