What Wall Street needs to keep rallying

Snapchat's $20 billion valuation, and other MoneyWatch headlines

U.S. equities enjoyed another curious surge on Tuesday, mirroring the rallies seen on May 10 and May 16, this time thanks to a massively positive new home sales report. Elements of bargain hunting were also in play, with downtrodden big-tech stocks leading the way higher.

Yet the bulls were unable to push large caps back over their 50-day moving average, suggesting the downtrend from the mid-April high isn't over.

We'll need to quickly see follow-up gains and a move by the Dow Jones industrials index over its 50-day moving average toward resistance above 18,000 to quell fears that a suddenly hawkish turn by Federal Reserve officials in recent days really hasn't spooked investors.

Philadelphia Fed President Patrick Harker on Monday night said he could easily see two or three rate hikes this year. That echoes a common sentiment heard from Fed officials over the last few weeks that futures market expectations for a single rate hike this year are too low.

On Monday, San Francisco Fed President John Williams said the U.S. presidential election wouldn't pause rate hikes, of which he believes two to three are appropriate this year. He added that it would be better to hike while inflation is below the central bank's 2 percent target due to inherent policy lags with interest rate moves.

In China, St. Louis Fed President James Bullard said the labor market remains tight and could put upward pressure on inflation. He added that it's good to see the futures market moving away from the expectation of zero rate hikes this year.

For now, investors seem to be putting that -- and the possibility of a June rate hike -- out of mind, focusing instead on the approaching end of the weak first-quarter earnings season and ongoing strength in crude oil as memories of a weak first-quarter GDP report fade.

But Fed Chair Janet Yellen's speech on Friday at Harvard, if it reflects the recent hawkish bent of her colleagues, could change that blasé attitude in a hurry. Chances are, she'll modulate her comments to avoid spooking stock prices.

Nick Collas at boutique brokerage house Convergex explained in a note to clients that rotation into underperformers is fueling what looks, on the surface, to be an odd and unjustified stock price rebound given fundamental headwinds such as weak corporate earnings, the specter of higher interest rates and uneven consumer spending.

The three best-performing sectors on Tuesday (financials up 1.4 percent, tech up 2 percent and health care up 1.6 percent) are three of the worst-performing sectors so far this year. Yet the sectors that have been hot this year -- such as utilities, energy, materials and telecoms -- underperformed.

While this is no guarantee the surge will continue, it at least shows where investors should focus as we prepare the enter the second half of 2016 -- and as we await the outcome and reaction to the Fed's June policy decision.

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