That didn’t last long- the S&P 500 (SPX) pullback only lasted one short week before the bulls regained control of this market and sent stocks to fresh record highs after 6/18’s Fed meeting. The fact that the consolidation only lasted one week illustrates how strong the bulls are right now. The major averages are still extended but this is a good real-time example of how extended markets can sometimes get more extended before they consolidate/pullback. Remember, in an uptrend, there are only two ways a market can consolidate a recent move; either move sideways or pullback. Some consolidations are longer than others and this recent consolidation just happens to be much shorter than almost anyone expected. Last week we wrote, “ it is easy to get caught up in the latest (negative) headline du jour- careful falling into this trap because that tends to distract people from remaining objective and analyzing facts (price action), not opinions. The market pulled back last week because it was over bought-latest negative geopolitical headline(s) aside.” Keep that in mind the next time you find yourself focusing on a negative headline and not the market.
MON-WED: Fed- Easy Money Stance Here To Stay
Stocks were relatively quiet on Monday as investors digested the latest round of M&A news, geopolitical tensions and economic data. On the M&A front, Medtronic (MDT) acquired Dublin-based Covidien (COV) for $42.9 billion. MDT plans to move its headquarters to Ireland which will save them a bundle on taxes. Sandisk (SNDK) acquired Fusion IO (FIO) for $1.1 billion. Finally, Williams Companies said it agreed to buy Access Midstream Partners for $5.99 billion. Geopolitical woes continued as the situation in Iraq and Ukraine remained a mess. Economic data was mostly positive with the Empire Manufacturing Survey rising to 19.3 easily beating estimates for 12.8. Separately, industrial production rose +0.6%, beating estimates for a gain of +0.5%. Finally the NAHB Housing Market Index rose to 49, beating estimates for 46.
Stocks edged higher on Tuesday as investors waited for Wednesday’s Fed meeting and continued to deal with the latest geopolitical and economic headlines. Economic data was less than ideal. Housing starts slid -6.5% in May to 1.001 million, missing estimates for 1.028 million. Multifamily construction fell -7.6% to 376,000, also missing estimates. Single-family construction also missed estimates and fell by -5.9% to 625,000. That was the lowest level since 589,000 single-family homes were started in February. A separate report showed consumer prices rose by +0.4% in May, up from a +0.3% rise in April. That was the largest increase since February 2013 and beat estimates for a gain of +0.2%. Stocks rallied on Wednesday after the Fed gave the bulls the proverbial green light that their easy money stance is here to stay and said that rates will stay low even after QE 3 ends.
THURS-FRI: Stocks Drift Higher
Stocks overcame earlier weakness on Thursday and closed higher which is a testament to how strong the bulls are right now. Weekly jobless claims slid by 6k to 312k in the same week that the household survey for the June employment report was conducted. The Philadelphia Fed Index rose in June to 17.8 from 15.4 in May. Meanwhile, the Leading Indicators Index for May rose by +0.5% on top of a 0.3% increase in April. Stocks were quiet on Friday and closed near their highs for the week (another bullish sign).
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 rallied and hit new highs. 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.
S&P 500: SPX