Stocks positively reversed (opened lower and closed higher for the week) as interest rates negatively reversed (opened higher and closed lower) as fear eased regarding when the Fed will taper. Normally, “reversals” after a decent move signal a short-term change in trend may be on the horizon. As long as stocks stay above last week’s lows and rates stay below last week’s high we should expect stocks to bounce and rates to fall. However, if those levels are breached we should expect stocks to fall further and rates to edge higher. In the middle of August, several leading stocks fell in heavy volume which is not ideal for the bulls. At this point, we know the Bernanke Put (or global Central Bank easy-money put) is getting weaker by the day (as we inevitably get closer to when the Fed will taper). It will be interesting to see how the market reacts to the news.
1987 VS 2013: A QUICK LOOK
It is important to note that Jan-Aug 2013 looks eerily similar to Jan-Aug of 1987. We are not there yet but something we are watching closely. Here are a few facts for your review: In 1987, the S&P 500 soared over 30% from Jan-Aug. So far, in 2013, it vaulted 20% during that period. In 1987, the S&P 500 topped out at the end of August then broke below its 50 DMA line in September. Then support was broken on Oct 14, 1987 when it took out its recent lows – just above 308 (& no that is not a typo!). Then it broke and closed below its 200 DMA line on October 15th. The following Monday was “Black Monday” where the S&P 500 lost an incredible -15% in one day! We are not sure how the rest of 2013 plays out but we will be on the look out for further weakness.
MONDAY-WEDNESDAY’S ACTION: STOCKS FALL ON TAPER TALK
On Monday, the DJIA & SPX logged their first 4-day losing streak of 2013 as the benchmark S&P 500 index slid and closed below its 50 DMA line. The one caveat is that, on average, the recent decline in the market has occurred on relatively light volume. Volume is a critical indicator of institutional demand therefore a low volume decline suggests large institutions are not aggressively selling stocks. Moreover, a high volume move (up or down) suggests large institutions are more actively involved.
On Tuesday, overseas stock markets fell sharply but US stocks edged higher. Perhaps the most pronounced move came from Jakarta’s Stock market. Overnight, Jakarta’s composite plunged nearly -5% placing it in bear market territory, having lost over 20% from its high in May. Elsewhere, Thailand’s stock market fell over 3%. Meanwhile, Japan’s Nikkei closed at a two month low which bodes poorly for US stocks.
Stocks fell again on Wednesday sending the DJIA to its first 6-day losing streak of 2013. The FOMC released the minutes of their last meeting which did not provide a clear signal regarding the Fed’s tapering schedule. We find this a bit odd since one of Bernanke’s stated goals is to create more transparency at the Fed. Economic data was mixed. Existing home sales soared 6.5% in July to an annualized rate of 5.39M which easily beat the Street’s estimate for a gain of 5.15M. Weekly mortgage applications slid for a second straight week as interest rates continue to curb demand.
THURSDAY & FRIDAY’S ACTION: Rates Fall; Stocks Edge Higher
Stocks opened higher on Thursday as investors digested a slew of stronger-than-expected economic data. The big news was that the Nasdaq shutdown for three hours due to a technical glitch. Nasdaq’s CEO should be fired now that this is the second major “error” – because he botched the Facebook IPO in Q2 2012. Manufacturing across the globe continues to improve. Overnight, China’s PMI topped estimates and rose above the boom/bust level of 50 for the first time in four months. Eurozone PMI also beat estimates, jumping to the highest level since June 2011. For the hat trick, US “flash” PMI rose to the highest level since March., also beating estimates. Separately, July leading indicators rose to 0.6%, just higher than the 0.5% forecast. Meanwhile, weekly jobless claims rose 336k, a bit higher than the 330k expectation. Stocks were quiet on Friday as a few Fed heads came out and continued sending mixed messages regarding when the Fed will taper.
MARKET OUTLOOK: BEARS ARE GETTING STRONGER
The market still has some issues but under the surface a few areas look healthy and the market looks like it wants to bounce into month-end. Defensive is paramount until the major averages definitively regain their 50 dma lines. 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.
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