The Dow briefly topped its April 26 high of 11,205 Monday, only to give back the bulk of its gains and close up 31 points at 11,164. If the Dow can capture a new high, it would mark its loftiest level since mid-September 2008, just days before the bankruptcy filing of investment bank Lehman Bros. and the start of the credit crisis and economic turbulence.
Jim Stack of InvesTech Research views the recent strength as a positive. "Bull market green light reconfirmed," he told clients Monday in a report.
Mary Ann Bartels at Bank of America Merrill Lynch says the market is at a pivotal point, but isn't certain if stocks will break out to new highs or fall back into a trading range. "November could be the pivotal point" for stocks, she said in a client note. Next week's election and Federal Reserve meeting are key drivers, she adds.
What's driving the gains?
•A friendly Fed. The Fed's signal to markets that it would do more to boost the economy has put a floor under stock prices. The Fed's pledge to keep short-term interest rates near zero, coupled with its plans to embark on a second round of purchases of U.S. government bonds to keep borrowing rates low — known as quantitative easing, or QE2 — has had many bullish implications.
The biggest bump from QE2 has been the decline in the value of the U.S. dollar, which has resulted in the return of what's known as the "risk-on" trade. The biggest gains have been in the energy and commodity space, as a weak dollar makes them cheaper in countries with stronger currencies.
•Impressive earnings. Despite a nearly 10% jobless rate, U.S. companies keep posting better-than-expected profits, bolstered by cost-cutting, job cuts, strong demand for their products abroad and rising worker productivity. Heading into the week, 83% of the 159 companies in the Standard & Poor's 500 index had posted earnings results that topped expectations, says Thomson Reuters. In a typical quarter, only 62% top forecasts.
•Fading double-dip fears. The economic data that are coming in have been better than expected, reducing investor fears of an economic relapse. Monday's reading on existing home sales, for example, beat forecasts.
•Seasonal market strength. The period following the midterm elections has traditionally been bullish. The third year of the presidential cycle is the best year of the four for stock returns. And with stocks nearing new highs, money managers are buying more stocks to keep up with their peers.
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