Nasdaq Futures

The stock market had its second straight down week, with the Dow Jones Industrial Average (INDEX: ^DJI  ) ending down 1.6%, the S&P 500 (INDEX: ^GSPC  ) down 2%, and the Nasdaq (INDEX: ^IXIC  ) down 2.2%.

If we have to assign reasons for the market drop, we can split it up the blame by major global region:

• In the U.S., the market has reacted negatively to Federal Reserve Chairman Ben Bernanke’s stated reluctance in early April to buy more bonds to prop up the economy — at least at the current time. After that, last week’s March jobs report, while not terrible, still disappointed.
• In Europe, there seems to be more and more coverage of each move in the yields and credit spreads of Spain and Italy. It’s the latest focus of the European drama that has dominated slow news days for months.
• In China, this week saw the reporting of first-quarter GDP growth of 8.1%. That may seem high, but it was disappointing to many, as it’s the weakest growth number for China in almost three years.

But perhaps more notable than the market drop was the volatility. The Dow was up or down at least 1% for four of the five market sessions. That’s a lot of volatility compared with the rest of 2012, but the markets have been especially calm recently. As my colleague Morgan Housel put it in late March: “Last year, the Dow Jones Industrial Average closed up or down more than 1% 89 times. In 2008 and 2009, it bounced up or down more than 1% over 100 times. Yet so far this year, it’s happened only a few times.”

All to say, we can never predict when and why the market will act up. All we can do is allocate our portfolios so we can sleep at night regardless.

The real news
Moving on to earnings season, which kicked off this week, two Dow components have already reported: Alcoa (NYSE: AA  ) and JPMorgan Chase (NYSE: JPM  ) . Although their stocks reacted differently, both reports were strong.

Alcoa is up 2.3% on the week after reporting positive earnings — a surprise $0.09 a share. Meanwhile, JPMorgan is down 2.5% after it also beat expectations and last year’s tally — $1.31 a share if you’re scoring at home. As a JPMorgan shareholder who isn’t looking to sell anytime soon, I’ll take strong fundamentals and a lowered stock price over the opposite any day.

The strong performances of bellwether stocks Alcoa and JPMorgan bode well for the rest of earnings season. For a sneak peek of what’s ahead, check out our report: “5 Stocks Investors Need to Watch This Earnings Season.” Our analysts discuss what’s ahead for Apple and four other must-watch companies. Access it now.

This week, the Dow Jones Industrials (INDEX: ^DJI  ) eclipsed 13,000 for the first time since May 2008, while the Nasdaq (INDEX: ^IXIC  ) broke through 3,000 for the first time in 11 years. A short time after hitting its milestone, however, the Dow retreated and finished about even for the five trading days. Immediately, headlines emerged claiming there was a psychological barrier weighing down the index at this level, that “some investors are worried about Dow 13,000.”

Why would that be the case? At this point, it’s unclear. After all, the Dow tracks the biggest, most financially stable companies, serves as a leading indicator for the economy, and has risen nearly 100% since hitting a 12-year low of 6,547 on March 9, 2009. Sure, on Wednesday, Ben Bernanke outlined a continued sluggish economic recovery, but for the most part the Federal Reserve chairman was optimistic about the United States and a gradually declining unemployment rate.

Perhaps more importantly, in his shareholder letter this week, the Oracle of Omaha, Warren Buffett, outlined an economy that was getting back on track. He even noted that the housing market would rebound as the supply-and-demand picture reversed course. In Buffett’s words:

Every day we are creating more households than housing units. People may postpone hitching up during uncertain times, but eventually hormones take over. And while “doubling-up” may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure.

Bernanke didn’t phrase it in those terms, but Buffett never fails to get down to the brass tacks of the matter. After all, what twentysomething living on a futon wants a curfew?

Besides housing, however, Buffett shed some light on another sector that has been off limits for many investors over the past few years: banking. Coincidentally, Buffett’s endorsement of the banking sector might have bolstered the shares of JPMorgan Chase (NYSE: JPM  ) and Bank of America (NYSE: BAC  ) during the week. These two stocks were the biggest gainers on the Dow, while another Buffett bank holding was right there with them.

What did Buffett have to say about his bank holdings? Well, generally, that he likes them.

Specifically, he praised Jamie Dimon’s leadership at JPMorgan, noting that Dimon’s shareholder letter was one of his favorite reads. Buffett also pointed out that Bank of America has made excellent progress in cleaning house, fixing up its balance sheet, and nurturing a huge and attractive underlying business that will endure long after today’s problems are forgotten. Finally, Buffett waxed poetically about the “wonderful business” at Wells Fargo, a company so exceptionally managed that Buffett once claimed he would bet his entire net worth on its stock.

Buffett’s been known for marching boldly into the fray, and perhaps investors should quit dilly-dallying and jump on the bandwagon. While these Dow stocks attracted his interest, there’s another undervalued company Buffett would love to get his hands on if he could. Discover a stock that you can buy now but is too small for Buffett. Find out more in our free report, “The Stocks Only the Smartest Investors are Buying.” Considering the broad rebound in the banking sector, this opportunity to get in on the ground level is too enticing to pass up.