Friday, July 13, 2012
Stock Market Commentary:

Stocks and a slew of other “risk-on” assets spent most of the week in the red before staging a strong rally on Friday to help send them into positive territory. The big catalyst for the week was stronger-than-expected earnings reports from US companies, especially JP Morgan (JPM) and Wells Fargo (WFC). The market is back in rally-mode which suggests the path of least resistance is higher. The current rally began on the June 29, 2012 follow-through day (in the immediate wake of late June’s EU summit). At this point, investors appear to be looking past the larger macro concerns (e.g. a slowing global economy, European debt crisis, fiscal and monetary cliff in the US, et al) as they continue to snap up risky assets.

Monday-Wednesday’s Action- Stocks Quiet Ahead of JPM & WFC Earnings:

Stocks fell on Tuesday after several US companies issued profit warnings and the latest dark clouds in Europe resurfaced. Stocks opened higher but closed lower, which is a sign of weakness, not strength, after EU officials gave Spain an additional year to meet a 3% budget deficit target. Euro-zone finance officials also agreed to allow Spain’s banks to access up to 30 billion euro ($36.9B) in additional funding by the end of July. The final figure, which will be announced on or before July 20, could hit 100 billion euros.  However, stocks fell after Italian Prime Minister Mario Monti reaffirmed that his country will not need a bailout but might access Europe’s stability fund, if needed. In the US, the National Federation of Independent Business said its small business index, which measures small business sentiment, fell hard in June for the second consecutive month. This bodes poorly for the ongoing economic recovery. 

Thursday & Friday’s Action- JPM & WFC Top Estimates:

Stocks opened sharply lower on Thursday but spent the rest of the day erasing earlier losses to close near the session’s highs. Stocks soared on Friday as investors digested the latest round of economic and earnings data. Before Friday’s open, overall producer prices swelled by +0.1% in June which topped the Street’s estimate for a decline of -0.6%. Meanwhile, core prices, which exclude food and energy, rose by +0.2% in June which matched estimates. The big news was that both JPM and WFC surprised the Street by reporting stronger-than-expected Q2 earnings results. This bodes well for earnings season and helped allay a lot of concerns that the US financial sector was suffering.

Market Outlook- Rally Under Pressure

From our point of view, the current rally is in a confirmed rally which means the path of least resistance is higher. It is somewhat encouraging to see all the major averages close above their respective 50 DMA lines. Technically, the 200 DMA line and June’s lows are the next level of support while April’s highs are the next level of resistance for the major averages.  As always, keep your losses small and never argue with the tape. If you are looking for specific help navigating this market, feel free to contact us for more information. That’s what we are here for!