U.S. stocks rose, sending benchmark indexes to their best gains this year, as claims for unemployment benefits fell and earnings from Walt Disney Co. to Akamai (AKAM) Technologies Inc. surpassed estimates.

Disney gained 5.3 percent after posting quarterly profit that beat estimates. Akamai, which helps speed Internet-data delivery for customers such as Apple Inc. and Sony Corp., soared 21 percent after beating forecasts for quarterly earnings. Coca-Cola (KO) Co. advanced 1.1 percent after agreeing to buy 10 percent of Green Mountain Coffee Roasters Inc. for about $1.25 billion. Green Mountain surged 26 percent. Twitter Inc. plunged 24 percent after reporting a wider-than-projected loss and slowing user growth.

The Standard & Poor’s 500 Index (SPX) climbed 1.2 percent to 1,773.43 at 4 p.m. in New York. The Dow Jones Industrial Average to added 188.30 points, or 1.2 percent, to 15,628.53. Both measures capped their biggest gains since Dec. 18. About 6.9 billion shares changed hands on U.S. exchanges, 9 percent above the three-month average.

“The economy is showing somewhat steady improvement and earnings have been good,” Richard Sichel, chief investment officer at Philadelphia Trust Co., said in a telephone interview. He helps oversee $1.9 billion. “The better economic reports are helpful, it gives a little bit of a confidence booster.”

The S&P 500’s rally today trimmed its decline in 2014 to 4.1 percent. The gauge has lost 0.5 percent this week as disappointing data on manufacturing raised concern about the strength of the world’s largest economy.

David Fuller's view

There was reason enough here for some bargain hunting and short covering by investors, against the background of the short-term oversold condition which I repeated in last night’s Audio.  So looking at these charts: DJIA (weekly & daily), SPX 500 (weekly & daily), Russell 2000(weekly & daily) and Nasdaq 100 (weekly & daily), how far will this rally carry?

Tests of the 200-day moving averages have been my minimum expectation.  Currently only the DJIA has done this, although the SPX and RTY fell close to those levels.  The NDX was the most overstretched at yearend and has only retraced half of its overextension versus the MA.  These indices are still technically short-term oversold as you would guess and can see from the Stochastics indicators in the Chart Library.  Just bring up a chart and click on the ‘Charting’ link in the tool bar immediately above each graph.

Against this short-term oversold condition and with some favourable economic news today, I would not be surprised to see these indices, indeed most other stock market indices, rally on Friday and possibly into next week.  However, I would be surprised to see new highs for any stock market indices which have lost their uptrend consistency, which you can see from the USA charts above.  These include somewhat larger pullbacks and breaks of the December reaction lows by all but the NDX.  However, NDX did see inconsistencies in the form of an upside failure in January, a break beneath the lower side of that last step and the biggest reaction since May-June.

I am certainly not expecting a bear market for these US indices.  Money supply is too favourable for that, albeit less favourable than it was as QE tapering is underway.  However, I think this short-term rally will only last for a few days before we see further ranging at best.  Having lost uptrend consistency, the probability is that US indices will see some additional correction in the weeks ahead.  Therefore, I am likely to open some more hedge short positions, although preferably at somewhat higher levels and when the short-term oversold conditions have been corrected.

I maintain that 2014 will remain a choppy year for stock markets in general.  Therefore, I would avoid chasing rallies and only buy stocks that you like following setbacks.  I believe Wall Street has entered a lengthy medium-term valuation contraction cycle.  However, this would be nothing like the longer-term valuation contraction cycle that we saw in waves from the late 1990s through 2008.  On a longer-term basis, I am very bullish on the US stock market, not least because of its highly competitive energy costs and America’s expanding lead in the hugely important field of accelerating technological innovation.