New York: If Wall Street needs to climb a wall of worry, it will have plenty of opportunity next week. Major United States stock indices will make another attempt at reaching all-time records, but the fitful pace that has dominated trading is likely to continue.
Next Friday's unemployment report and the hefty spending cuts that look like they about to take effect will be at the forefront.
The importance of whether equities can reach and sustain those highs is more than Wall Street's usual fixation on numbers with psychological significance. Breaking through to uncharted territory is seen as a test of investors' faith in the rally.
"It's very significant," said Bucky Hellwig, senior vice-president at BB&T Wealth Management in Birmingham, Alabama. "The thinking is, there's just not enough there for an extended bull run," he said. "If we do break through (record highs), then maybe the charts and price action are telling us there's something better ahead."
Flare-ups in the eurozone's sovereign debt crisis and next Friday's report on the US labour market could jostle the market, though US job indicators have generally been trending in a positive direction.
Small- and mid-cap stocks hit lifetime highs in February. Now the Dow Jones industrial average and the S&P 500 are racing each other to the top.
The Dow, made up of 30 stocks, is about 75 points — less than 1 per cent — away from its record close of 14,164.53, which it hit on October 9, 2007. The broader S&P is still 3 per cent away from its closing high of 1,565.15, also reached on October 9, 2007.
The advantage may be in the Dow's court. So far in 2013, it has gained 7.5 per cent, beating the S&P 500 by about 1 per cent.
The Dow's relative strength owes much to its unique make-up and calculation, as well as to investors' recent preference for buying value stocks likely to generate steady reliable gains, rather than growth stocks. But the more defensive stance illustrates how stock buyers are getting concerned about this year's rally. While investors don't want to miss out on gains, they're picking up companies that are less likely to decline as much as high-flying names — if a market correction comes.
The Russell Value Index is up 7.6 per cent for the year so far, outpacing the Russell Growth Index's 5.7 per cent rise. Within the realm of the S&P 500, the consumer staples sector led the market in February, gaining 3.1 per cent.
There is some concern that growth-oriented names are being eclipsed by defensive bets, said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati.
"This isn't a be-all and end-all sell signal by any means, but we would feel much more comfortable if some of the more aggressive areas, like technology and small caps, would start to gain some leadership here," Detrick said.
Signs that investors are becoming concerned about the rally's pace is evident in the options market, where the ratio of put activity to call activity has recently shifted in favour of puts, which represent expectations for a stock to fall.
The put-to-call ratio representing an aggregate of about 562 financial stocks is 1:1.