After seven straight down weeks for the S&P 500 Index and eight weeks of declines by the Dow Jones Industrial Average, stocks staged a big comeback from lows last Tuesday to finish the week with robust gains across the board. Sentiment gauges from the AAII survey to Investor’s Intelligence’s roundup of investment newsletter editor outlook had been flashing multi-decade highs in pessimism. Technically, put-call ratios had also spiked to levels associated with widespread panic. but now they are on the decline and helping to thrust stocks higher as pessimism recedes from unsustainable peaks.

The most important piece of economic news came out on Friday after the rally was well underway when the Commerce Department reported that the core personal consumption expenditure (PCE) price index rose at a 4.9% annual rate in April, which was a deceleration from the 5.2% pace in March. The report provided hope that the Federal Reserve would not need to be as aggressive as planned in hiking rates in the coming months. Next Friday’s nonfarm payrolls report for May will be another critical piece of data for handicapping the Fed’s moves.

By the end of the week, both the S&P 500 Index and the Russell 2000 Small Cap Index had both gained 6.6%. It would not be unreasonable to see this rally take the S&P 500 to it’s declining 50-day moving average, but there is a lot to prove for the bulls to make this burst of buying anything more than a rally within a larger downtrend.

The biggest gains last week came from the sector that has been the most beaten down this year: Consumer staples jumped higher by 9.5%. A 4.3% increase in crude oil prices helped drive the energy sector higher by 8.3%. Growth stocks outperformed value, and domestic equities performed better than international stocks.

Equity Income Universe: Last week, the top performing equity income funds that we track were the WisdomTree MidCap Dividend (DON

DON
+6.6%) and FlexShares Quality Dividend (QDF

QDF
+6.3%).

Dividend growth funds have been big underperformers this year, but the style shined last week with T. Rowe Price Dividend Growth (PRDGX +6.2%), WisdomTree U.S. Quality Dividend Growth (DGRW

DGRW
+6.2%) and Vanguard Dividend Appreciation Index (VIG

VIG
+6.2%) all gaining more than 6%.

Also jumping more than 6% were the year-to-date total return leader, Alerian MLP (AMLP

AMLP
+6.2%) master limited partnership ETF, and the VanEck BDC Income (BIZD

BIZD
+6.2%) business development company ETF.

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FDI Portfolio Action: Last week’s Forbes Dividend Investor portfolio of 22 stocks gained an average of 4.87%, with only two stocks failing to post positive returns.

Our top performer was master limited partnership Holly Energy Partners, L.P. (HEP +8.9%). Also higher by more than 8% for the week were Luxembourg-based steel maker Ternium

TX
SA
(TX +8.7%), chemicals maker LyondellBasell Industries

LYB
NV (LYB +8.5%), and International Business Machines (IBM +8.4%).

Special Offer: Click here for access to the complete Forbes Dividend Investor portfolio of stocks with an average yield of 4.75%…plus three new buys in broadcasting, chemicals, and banking.

Capturing Call Premium On The Bounce

A medium-term bearish environment with at least a temporary burst of bullishness is one in which selling covered calls makes sense. Last Monday, we sold covered calls on Tyson Foods

TSN
(TSN +6.8%) and Kraft Heinz (KHC -0.3%). Both companies had ex-dividend dates last week.

Selling the same TSN $87.50 July 15 calls would now earn you $5.30, based on Friday’s closing price for Tyson of $91.04. With Kraft Heinz, the $39 July 1 calls we sold for $1.30 last Monday now trade for only $0.65-$0.70. Going out to the July 15 expiration and selling slightly in-the-money KHC $37.50 calls earns premium of $1.65-$1.70.

To earn additional income from dividend-paying stocks, try Forbes Premium Income Report risk-free for 90 days with two new options-selling trades every Tuesday and Thursday afternoon.

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