Stocks Mixed In Final Week of 2nd Quarter: 06.27.14

Stocks ended mixed on the last full week of the second quarter. Barring a massive sell off on Monday (last day of the qtr), Q2 will go down in history as another very strong quarter for this very strong bull market- which is why our short, intermediate and long term outlook remain strong. In the short term, the major averages have spent the past 2 weeks pausing to consolidate their recent and robust rally. Remember, in an uptrend, there are only two ways a market can consolidate; either move sideways or pullback. Right now the market is moving sideways and that is the more bullish of the two scenarios. The best way to interact with markets is to focus on what is happening right now (known) and avoid the temptation to predict the future (which by definition is unknown). That said, right now we are in a very strong bull market and weakness should be bought until further notice.
MON-WED: NEGATIVE/OUTSIDE REVERSAL
Stocks were quiet on Monday as investors digested the latest round of economic and M&A news. On The economic front, The National Association of Realtors said existing home sales grew by +4.9% in May to an annualized rate of 4.9 million, beating estimates. Overseas economic data was also mixed. The HSBC/Markit Flash China Manufacturing Purchasing Managers’ Index rose to 50.8 in June from May’s 49.4, while the Markit’s Composite Purchasing Managers’ Index for the euro zone slid to 52.8 from May’s 53.5. Markit’s flash PMI reading for the United States for June rose to 57.5 in June from 56.4, with the latest read beating expectations for 56.5. In M&A news, Micros Systems rose after tech-giant Oracle offered to buy the software powerhouse for $5.3 billion in cash. Google also made a $500M acquisition.
Tuesday marked a pivotal day for stocks. The major averages traced out a negative and outside reversal for the day. Negative reversals occur when a market or stock opens higher and closes lower. Negative reversals -AFTER a big move – typically mark a near term top (change in trend). On a daily basis the major averages also traced out an outside reversal day to the downside. An outside reversal day occurs when when the market opens higher and closes lower but during the process eclipses the entire range of the prior day (the prior day’s high and low). The Case-Shiller index of home prices jumped to +10.8% in April from the year earlier, and rose +1.1% from March. Meanwhile, new-home sales for May jumped to a six-year high in May, up +18.6% to a seasonally adjusted annual rate of 504,000 units, beating 440k forecast. The consumer confidence index for June came in at 85.2, beating estimates of 83. Philadelphia Federal Reserve Bank President Charles Plosser said the economy is nearing the central bank’s targets more quickly than expected, and could have the Fed increasing interest rates sooner than anticipated, which also weighed on markets.
Before Wednesday’s open, the government said Q1 GDP contracted by -2.9%, widely missing estimates, and it was the weakest quarter since Q1 2009! The big miss was blamed on the polar vortex but the real question is: how much worse would GDP have been if the Fed was not printing billions of dollars every day to stimulate the economy (via QE)? Stocks rallied after the big miss because the notion is that the weaker than expected data will force the Fed to continue it “easy money” stance longer than initially expected (which is the primary driver of this very strong bull market).
THURS-FRI: STOCKS MOVE SIDEWAYS
Stocks opened lower on Thursday after a Fed official (Bullard) spooked investors and said rates will go up sooner than initially expected. Consumer spending missed estimates which also weighed on markets since the US consumer makes up approximately 2/3 of the overall economy. After the initial sell off, the bulls showed up and erased most of the day’s losses. Stocks were relatively quiet on Friday as the Russell indices re-balanced and US consumer confidence remained optimistic. The Thomson Reuters/University of Michigan’s index on consumer sentiment rose to 82.5, up from 81.9 in May.
MARKET OUTLOOK: BUY WEAKNESS

The market is counter-intuitive in nature and tends to fool most people most of the time. That said, everyone was expecting the market to pullback but instead- it refuses to fall. This illustrates how strong the bulls are right now and that weakness should be bought, not just strength. Keep in mind that this bull market is aging (turned 5 in March 2014 and the last two major bull markets ended shortly after their 5th anniversary; 1994-March 2000 & Oct 2002-Oct 2007) but until we see signs of distribution (heavy selling) the market deserves the bullish benefit of the doubt. As always, keep your losses small and never argue with the tape.