The S&P 500 ended the week higher and came within a few points of turning positive for the year. The market continues acting very well as it continues consolidating its very strong year-end rally. Remember the bullish fundamental backdrop is still in place for stocks. There bulls are looking for two possible scenarios to occur: 1. The economy grows organically or 2. The Fed continues or increases QE to help the economy grow. Both scenarios are bullish for stocks in the near term. The biggest concern is what happens when the law of diminishing returns kicks in and all the Fed printing doesn’t help Main St or Wall St? My answer is to align ourselves with what is actually happening and if and when that occurs- we’ll cross that bridge when we get there. Until then, Main St and Wall St are responding very well to QE. As we have mentioned several times since late 2012, we are in a very strong bull market and pullbacks should be bought, not sold. In the short term, the market is clearly extended and due for a another short term shallow pullback. Meanwhile, the intermediate and long term outlook remain very bullish as the major averages and a slew of leading stocks continue to act very well.
MONDAY-WEDNESDAY’S ACTION: Bulls Defend Support
Stocks experienced their largest decline in two months on Monday as fear spread regarding Q4 earnings. The selling was short-lived as the bulls showed up and defended support near prior chart highs. The S&P 500’s high in November was 1813 and Monday’s low was 1815- not a mistake. Several large M&A news was announced. Suntory Holdings said it would acquire Beam (BEAM), the maker of Jim Beam and other bourbons, for $14B. Charter (CHTR) made a bid to acquire Time Warner Cable (TWC) but TWC rejected the bid. Google (GOOG) said it would acquire Nest Labs for $3.2B.
Stocks opened higher on Tuesday after JPM and WFC reported Q4 results. Both stocks closed higher for the week which is a strong sign of buying demand. Gamestop (GME) plunged nearly 20% after reporting their numbers. Economic data was light- retail sales rose 0.2% in December which beat estimates for an unchanged reading. Stocks rallied on Wednesday, helping the benchmark S&P 500 briefly turn positive for the year. The S&P 500 encountered resistance near prior chart highs and pulled back slightly to close just below 1850. At this point, the S&P 500 is building a new base between 1850 and 1813. One should expect this sideways action to continue until either support (1813) or resistance (1850) is breached. Separately, shares of Bank of America (BAC) gapped up after the bank beat numbers.
THURSDAY & FRIDAY’S ACTION: Stocks Almost Turn Positive in 2014
Stocks were quiet on Thursday but continued trading near their 2014 highs as sellers remained at bay. This is exactly the healthy action one wants to see in a bull market. Shares of Best Buy (BBY) gapped down a whopping -30% after the company announced disappointing Q4 results. Goldman Sachs (GS) beat expectations but Citigroup (C) missed. Overall financials have fared well this earnings season which bodes well for Main Street. Economic data was mixed. Weekly jobless claims slid while the cost of living rose by 0.3% last month. The National Association of Home Builders said home builder confidence fell this month after spiking in December. Finally, the Philadelphia Fed’s manufacturing index rose to 9.4 in January from a revised 6.4 in December. Stocks ended mixed on Friday and just below 2013’s highs which is bullish.
MARKET OUTLOOK: BULLS ARE IN CONTROL
As we have been saying all year, the market is very strong in all three time-frames: short, intermediate, and long. The last pullback was shallow in size (%decline) and scope (days/weeks, not months). As always, keep your losses small and never argue with the tape.