Finally, after 8-strong positive weeks for the S&P 500 we began to see signs of distribution, especially in overseas markets. As you know by now, from my point of view, the primary two catalysts that sent stocks higher in recent months are: The Global Stability Put (GSP, the latest buzz word from Davos) and an improving global economy. Both of these catalysts were questioned last week: first by the minutes from the US Fed which showed that stimulus might end sooner rather than later and a slew of weaker than expected economic data reports were released. We have been saying for weeks that stocks were overdue for a pullback and our job right now is to analyze the health of this pullback. Ideally, we would see the major averages pull back on light volume into their prior 2012 chart highs or their respective 50 DMA lines. The uptrend that began on Friday, November 16, 2012- (after politicians hinted that a deal would get done for the fiscal cliff) remains intact and offers an interesting lesson for investors- stocks are closely paying attention to government officials (Since the 2009 low, every major rally was sparked by government action). Therefore it is very important to pay very close attention to central banks and government action until their policies change.
Monday-Wednesday’s Action: Markets Pullback
The U.S. stock market was closed on Monday in observance of President’s Day. Asian and European stocks were mixed to mostly lower after the G-20 dismissed the idea of a potential currency war developing. The yen fell sharply on the news which basically gave the Bank of Japan carte blanche on further easing. ECB President Mario Draghi said he urged the G-20 to be prudent when talking about currency movements.
Stocks opened higher on Tuesday as optimism spread that M&A is on the rise. Over the long weekend, rumor spread that Office Depot and OfficeMax are in advanced talks to merge. U.S. home builder confidence fell to 46 in February from 47 in January. Uncertainties about job growth and rising cost for building materials hurt confidence. The reading missed the Street’s estimate for 48 and fell short of the boom/bust level of 50. The last time confidence was above 50 was in April 2006. A slew of home builders fell on the news. Separately, confidence in Germany jumped which bodes well for Europe’s largest economy.
Stocks fell on Wednesday as investors digested a slew of data and the Fed hinted that QE might end sooner than previously expected. Economic data was mixed. Housing starts missed estimates while building permits topped estimates. Inflation remained in check as the producer price index (PPI) remained light. So far, more than 400 stocks in the S&P 500 have reported their results. Out of the stocks that reported, 67% have enjoyed stronger-than-expected earnings growth while revenue beats also topped prior quarters. Analysts believe that Q1 2013 earnings will be flat year-over-year which is down from the initial expectation of a +3% gain. Q1 revenue is expected to grow 1% from the same quarter last year. The minutes of the last Fed meeting were released which suggested that the easy-money stance may end sooner-rather than later. Overseas, the British Pound fell after the minutes of the Bank of England were released. The minutes showed that the BOE was ready to do more to stimulate the U.K.’s sluggish economy.
Thursday & Friday’s Action: Distribution
Stocks fell on Thursday as investors digested a slew of mixed economic data. The big miss came from the Philly Fed index which fell to -12.5 in February from -5.8 in January. Existing home sales rose by +0.4% to a seasonally adjusted rate of 4.92M which matched estimates. The bullish part of the report was that the supply of new homes plunged to the lowest level since December 1999. The Conference Board said its leading economic index rose to +0.2% to 94.1 in January which missed the Street’s expectation for a gain of +0.3%. The Labor Department said weekly jobless claims rose 20k to 362k which topped the Street’s estimate for 355k. The consumer price index allayed inflation woes and was flat for a second consecutive month. Stocks bounced on Friday but volume, a critical component of institutional demand, was lighter which is not a healthy.
Market Outlook: Uptrend Under Pressure
From our perspective, the market rally is under pressure as the major averages pullback towards support. 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.” 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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