Stocks and a slew of other risk assets enjoyed another strong week on as the risk on trade continued to dominate the investment landscape. The primary catalyst for the risk on trade was continued strength from the U.S. economy. From our point of view, the major averages confirmed their latest rally attempt on Tuesday 1.3.12 which was Day 9 of their current rally attempt. It was also encouraging to see the S&P 500 break above its downward trendline and its longer term 200 DMA line. Looking forward, the S&P 500 has done a great job staying above its Q4 2011 high (~1292) and is now doing its best to stay above 1356 which corresponds with July’s high. The next level of resistance is 2011’s high just above 1370. The bulls remain in control as long as the benchmark S&P 500 trades above 1292 and then its 200 DMA line.

Monday-Wednesday’s Action: Stocks Pause To Consolidate Recent Gains

Last Sunday, Greece’s parliament approved the closely contested austerity package for their second bailout from the EU/IMF. On Monday, Japan said its economy fell by -0.9% in 2011 which was their first full year contraction since the Great Recession in 2009! The country was hurt by a confluence of factors: waning growth from the developed world, floods in Thailand, a strong yen, and the Fukushima earthquake in March of 2011. Separately, Q4 earnings remain strong which has been a strong catalyst for the recent rally in risk assets. So far, 70% of the 352 S&P 500 companies that have reported earnings beat estimates so far which bodes well for the ongoing economic recovery. Before Tuesday’s open, investors digested the latest round of lackluster economic data. Retail sales grew by+0.4% last month which was half of the Street’s estimate for a gain of +0.8%. The Labor Department said import prices rose+0.3% while export prices rose +0.2% in January. Export prices matched estimates and topped December’s decline of -0.5%.
On Wednesday investors digested a slew of mostly stronger than expected economic data. The National Association of Home Builder’s said its monthly sentiment index rose 4 points to 29, which was its highest reading in four years. The Empire State survey topped estimates and rose to 19.53 in February which is another bullish feather in the economy’s cap. The minutes of the latest FOMC meeting were released and largely reiterated their recent publicly stated stance of cautious optimism. Finally, France and Germany’s gross domestic product (GDP) beat estimates. Germany’s GDP, Europe’s largest economy, fell by -0.2% in Q4 2011 which beat the -0.3% estimate. Meanwhile, France’s GDP, Europe’s second largest economy, rose by +0.2% which matched estimates.

Thursday & Friday’s Action: Healthy Economic Data Helps Stocks

Stocks were relatively quiet on Thursday even though the latest round of economic data was rather healthy in the U.S. The big news was that initial jobless claims fell sharply last week to 348,000, which was lower than the Street’s estimate for 365,000. The report also showed that continuing claims slid to 3.43 million from 3.53 million. A separate report showed that housing starts rose 699,000 last month which also topped the Street’s estimate for 671,000. Building permits rose slightly to an annualized rate of 676,000, which just beat the Street’s estimate for 675,000. The Philadelphia Fed Manufacturing Index rose more than expected to 10.2 in February. Finally, news on the inflation front was mild. The producer price index rose by +0.1% in January which was less than the average estimate for an increase of +0.3%. However, core prices jumped to +0.4% which was double the average estimate. Before Friday’s open, the Consumer price index rose +0.2% which missed the +0.3% expected on Wall Street. Higher gasoline prices were one of the strongest items to increase.