Stocks rallied for a fifth consecutive week as the major averages continue to march higher. As we have mentioned several times recently, in the short-term the market is a little extended and a light volume pullback would do wonders to restore the health of this rally. The fact that the market simply refuses to pullback is a bullish sign. The S&P 500 has formed a bullish 3-weeks tight pattern (best viewed on a weekly chart) and a move higher would suggest higher prices will follow. The intermediate and long term outlook remains bullish as the major averages and a slew of leading stocks continue to act very well. As we have mentioned several times this year, we are in a very strong bull market and pullbacks should be bought, not sold. Every pullback this year has been shallow in both size (% decline) and scope (weeks, not months). The primary catalyst behind this 4.5 year bull market remains easy money from global central banks. We know that the easy money is here to stay (for now). Therefore, barring some unforeseen massive decline, this bull market is alive a well. Eventually the music will end, but as a market practitioner, our only job is to align ourselves with what is actually happening, not what someone thinks will happen. That said, weakness should be bought until intermediate and longer-term technical levels are broken.
MONDAY-WEDNESDAY’S ACTION: Market Refuses To Fall
Stocks rallied on Monday led higher by small cap stocks. Due to the government shutdown, the Census Bureau released factory orders reports for August and September at the same time. The report rose by +1.7% in September after declining -0.1% in August. July factory orders were revised down from -2.4% to -2.8%.
Stocks opened lower on Tuesday but closed near their highs as investors digested a slew of earnings data. AOL, KORS, and CVS all traded higher after reporting earnings. Economic headlines were somewhat promising with the ISM service index rising to 55.4 in October from 54.4 in September. After Tuesday’s close, Tesla Motors (TSLA) gapped down after reporting earnings. Ahead of earnings, the stock was up over 400% YTD and after the gap down, TSLA is still up over 300%. The violence of this decline suggests, at least in the near term, the air maybe let out of the bag and this stock may continue to fall before going higher again. NFLX, GMCR, CMG are some recent examples of high flying stocks that suffered brutal pullbacks before turning higher again.
Stocks rallied on Wednesday after a few Fed officials reiterated their stance for more QE. According to Thomson Reuters, over 400 companies in the S&P 500 have reported earnings, nearly 70% beat Wall Street’s expectations which is better than the long-term average of 63%. The data shows only 53.3% beat revenue forecasts which is below the 61% average since 2002. Economic data was mixed. The Conference Board’s Index of Leading Indicators rose +0.7% for a second consecutive month in September, beating estimates for a gain of 0.6%. The reading might have been somewhat thrown off by the government shutdown. The weekly MBA Mortgage Index slid -7.0% to follow last week’s increase of 6.4%. Separately, October Challenger Job Cuts fell by -4.2% after a strong 19.1% jump in September.
THURSDAY & FRIDAY’S ACTION: STOCKS STAY POSITIVE FOR THE WEEK
Stocks fell hard on Thursday after the much anticipated Twitter (TWTR) IPO started trading. Before the bell, the ECB surprised the Street when they cut rates to stimulate their economy. This sent the Euro plunging and stock futures soaring. Shortly thereafter, US GDP beat estimates which strengthens the case for the Fed to taper QE. This caused a slew of growth stocks and all the major averages to fall in heavy trade. Interestingly, the drop was very short-lived (for now) as buyers showed up on Friday after the jobs report topped estimates. The Labor Department said US employers added 204k new jobs in October, easily beating estimates for a gain of 120k. Stocks edged higher, helping the S&P 500 close higher for the 5th straight week after US consumer confidence missed estimates ahead of the holiday shopping season.
MARKET OUTLOOK: SPX STAYS POSITIVE FOR THE WEEK
The market is very strong and at this point it is simply pausing to digest its recent and robust rally. We will monitor the health of the market to see if this turns into another short term pullback or something more substantial. Remember, we focus more on how stocks react to the news than the news itself. So far, the action has been very healthy which bodes well for this very strong bull market. Please note that our goal is to remain in sync with the broader trend of the market (up or down) and not get caught up with the minutiae of changing labels on the market status very often. As always, keep your losses small and never argue with the tape.