The major averages are strong and the fact that they simply refuse to pullback illustrates their strength. 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. That said, stocks are very extended in the short term and a light volume pullback would do wonders to restore the health of this rally. 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: Stocks Pause
Stocks fell on Monday as fresh concerns emerged out of Europe. Concern spread regarding Greece and Cyprus’ ability to grow. The big losers of they day were gold and silver. Precious metals were smacked after fear spread that the G-7 would change their stance in what could be the early stages of a new currency war. Reuters reported over the weekend that the G-7 could release a statement reiterating their stance that FX exchange rates should be “market-determined.”
Stocks were quiet on Tuesday ahead of Obama’s State of the Union address. I was quoted in MarketWatch saying, “The markets want to see if there is anything new for the direction of the country and the economy.” The G-7 said it wants to avoid another currency war and reaffirmed their commitment to let market forces determine exchange rates and said central bank policy will be focused solely on domestic objectives. Stocks were mixed to slightly lower on Wednesday after Obama’s State of the Union address failed to make any new major announcements. Obama presented his agenda for the second-term and attempted to push past the fiscal battles that plagued his first term. Obama said, “Let’s agree, right here, right now, to keep the people’s government open, pay our bills on time, and always uphold the full faith and credit of the United States of America…Most of us agree that a plan to reduce the deficit must be part of our agenda…But let’s be clear: deficit reduction alone is not an economic plan.” Retail sales rose 0.1% to $416.6 billion in January which matched estimates. Import prices rose +0.6% according to the Labor Department for the first time since October as fuel prices rose. Export prices increased a modest 0.3%.
Thursday & Friday’s Action: M&A Picks Up
Stocks fell on Thursday after GDP fell in Europe and Japan. Overnight, Japan said its economy contracted by -0.4% in Q4 2012 which missed the Street’s estimate for a gain of +0.1%. The euro was smacked after the latest data showed that Europe fell further into a recession. Euro zone GDP fell by -0.6% in Q4 2012 which was the largest drop since Q1 2009. For the year, Euro Zone GDP fell -0.5% in 2012. There was a flurry of M&A activity announced. AMR and LCC merged which formed the largest airline in the country. Separately, HNZ was acquired by Warren Buffett’s Berkshire Hathaway (BRKB) and a private partner 3G. Stocks were quiet on Friday as investors awaited the G-20 Meeting in Russia.
Market Outlook: Uptrend
From our perspective, the market is in a very strong uptrend which bodes well for both the market and the economy. 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. 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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