Stocks rallied for a sixth consecutive week as the major averages continue to march higher. As we have mentioned several times recently, in the short-term the market is 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 very bullish. 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 Is Strong
Stocks rallied on Monday helping the Dow Jones Industrial Average notch another record close. The bond market was closed in observance of Veteran’s Day. Amazon.com (AMZN) made headlines when the company said it inked a deal with the US Postal Service to deliver packages on Sunday. The news came ahead of the holiday shopping season. A separate report showed that online shopping is expected to grow several fold over the next few years.
On Tuesday, stocks fell as fear spread that the Fed may taper QE at their December meeting. We do not think they will taper in 2013 for a few reasons. First, neither of the Fed’s targets have been met: 1. Unemployment rate drops below 7% and (not or) 2. Inflation rises to 2%. Furthermore, an argument could be made that deflation is more of a concern right now than inflation. Another reason is that Janet Yellen is expected to take over in January and she is a big proponent of QE. So, from our point of view, the likelihood that the Fed tapers in December is not very high. Finally, the Fed knows that the Q4 shopping season is very important for the economy and we do not think they will go out of their way to hurt sentiment or hurt this anemic recovery.
Stocks opened lower on Wednesday but closed higher as investors turned bullish ahead of Janet Yellen’s testimony on Thursday. By the close, the S&P 500 and the DJIA jumped to fresh record highs as optimism spread Yellen will be dovish and support QE well into 2014. The fact that the market refuses to fall clearly illustrates how strong this market is right now.
THURSDAY & FRIDAY’S ACTION: Yellen Supports Meltup
Stocks rallied on Thursday as Janet Yellen spent the morning testifying on Capitol Hill. In case you missed nearly three exciting hours of Dr. Yellen’s testimony – It can be best summed up in two words: Melt Up. The Q&A went something like this: Q: Blah, Blah Blah, A: Meltup. Q: Blah, Blah Blah, A: Meltup. Q: Blah, Blah Blah, A: Meltup. so on and so forth. It is now abundantly clear that Yellen is just as/if not more dovish (supports QE),than Bernanke. From our point of view, the market remains very strong and it would be foolish to argue with this tape. Separately, it may be possible that housing stocks are trying to bottom if the Fed is able to keep rates low. Take a look at: XHB, TOL, DHI, LEN, to name a few. Economic data was light, weekly jobless claims slid by 2k to 339k which bodes well for the jobs market. Stocks continued to Meltup on Friday helping the S&P 500 enjoy its 6th straight weekly gain. NY manufacturing missed estimates which supports the argument for the Fed to continue QE for the foreseeable future.
MARKET OUTLOOK: SPX Approaches 1800
The market is very strong and, in the short-term, is getting more and more extended by the day. 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.