Friday, March 22, 2013
Stock Market Commentary:
Stocks ended slightly lower last week as Cyprus woes briefly hurt the riskon trade. So far the action in the major averages remains very strong as the number of distribution days remains limited and the last pullback was shallow in size and scope. The S&P 500 pulled back 2.9% after the minutes from the Fed’s last meeting hinted that QE
might end sooner than originally expected. The pullback lasted less than 1-week because Bernanke made it clear when he testified on the hill that the benefits of QE outweighed the costs. For months, we have been saying that we want to analyze the health of the pullback and so far the pullback was very healthy because it was short in both size and scope. Going forward, the 50 DMA lines are support for the major averages. Until they are breached, the market deserves the bullish benefit of doubt.
Monday-Wednesday’s Action: Cyprus Fears Weigh On Stocks
Over the weekend news broke that Cyprus plans to tax bank depositors to help fund a $10B euro bailout from the European Commission. Stocks opened lower on Monday as fear spread that other troubled European countries might try to impose the same insane policies on their depositors. Shortly after the open, buyers showed up and quelled the bearish pressure when news spread that Cyprus may change the plan when they vote later this week. In the US, economic data was light. Home builder sentiment index slid to 44 in March from 46 in February. The National Association of Home Builders index fell to the lowest level in five months and fell short of the Street’s estimate of 47.
Stocks ended mixed on Tuesday after Cyprus rejected the deposit tax which helped calm global fears. After the vote, the European Central Bank said it will provide liquidity to Cyprus within the existing rules which helped send the euro higher. In the US, housing starts rose by +0.8% in February to 917k after sliding -7.3% to 910,000 in January. Housing starts topped estimates for a gain of 911k.
Stocks rallied on Wednesday after the Federal Reserve held rates steady and reiterated its recent stance that bond buying will continue until the unemployment rate falls to 6.5% AND (not or) inflation tops 2.5%. Bernanke made it clear that he will stay the course until these two metrics are met. Elsewhere, a slew of home builders rallied after Lennar released their Q4 results.
Thursday & Friday’s Action: Cyprus Fear Eases
Stocks fell on Thursday as the ongoing drama continued with Cyprus. The latest chatter suggested Cyprus might leave the Euro. The country’s parliament is believed to have taken measures to merge two of its largest banks and impose capital controls in an attempt to stem significant outflows. Put simply, this is not a pretty picture. Economic data in the US was mixed to mostly positive as labor conditions, leading economic indicators and the Philly Fed improved and new home sales slightly missed estimates but are continue to move in a healthy direction. Talks between Cyprus and Russia fell apart on Friday but stocks rallied as hope spread that the tiny country will be bailed out.
Market Outlook: Uptrend
The market is strong as the bulls continue to quell the bearish pressure. Until the market breaks and closes below its 50 DMA line- the bulls deserve the benefit of the doubt. As always, it is extremely important to be flexible in your approach and change when the facts change (Thank you Mr. Keynes). For those of you that are new to our work, on October 9, we said “the rally was under pressure” and then said the “rally was over” on Oct 19. Immediately after that note was published, stocks fell sharply and a lot of technical damage occurred. Then we put out a note on Friday, November 16, 2012 (the exact low for this move) titled, “Time For A Bounce” and the rest is history. Most recently, on Wednesday, February 20, 2013 we sent out a note saying, “Time For A Pullback” and a week later on Feb 27, 2013 we sent a note saying “Bulls Quell Bearish Pressure.” Stay tuned as we will continue to keep you in sync with the market and ahead of the crowd. As always, keep your losses small and never argue with the tape.
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