Long-Term Look At The US Stock Market
Friday, October 5, 2012
Stock Market Commentary:
The major averages rallied last week and retested their prior chart highs after a two week consolidation. We find it very bullish to see the benchmark S&P 500 jump nearly 16% from June-September (1266-1474) and continue to flirt with fresh multi-year highs. It is also healthy to see the market pullback and digest the recent move in the latter half of September. Furthermore, the fact that stocks bounced in the first week of October after finding support near their respective 50 DMA lines also bodes well for this rally. At this point, we would like to continue giving the market the bullish benefit of the doubt and shall err on the bullish side as long as the major averages remain above their respective 50 DMA lines. However, if the selling intensifies one should quickly adjust their portfolio accordingly. The underlying notion that has helped stocks rally has been that global central banks will step up and do everything they can to avoid the global economy from imploding.
Monday-Wednesday’s Action: Stocks Rally On Decent Economic Data
Stocks ended mixed on Monday,giving back earlier gains, as investors digested a slew of data from across the globe. Overnight, China said its official PMI grew to 49.8 in September from 49.2 in August. The reading was below the boom/bust level of 50 but improved for the 7th consecutive quarter. Meanwhile, shares in Europe rallied as fear eased regarding Spanish banks’ need to access additional capital and Moody’s did not downgrade the debt-laden country. Eurozone PMI was revised up to 46.1 last month which was better than August’s reading of 45.1. Economic data in the US also helped fuel the rally. The ISM manufacturing index rose to 51.5 in September which beat the Street’s estimate of 49.7 and topped August’s reading of 49.6. Many investors are concerned that stocks will fall in October because historically this is a lousy month for stocks (1929 and 1987 crashes both occurred in October). However, the major averages have been up October since 2008.
Stocks spent most of Tuesday in the red as fear spread regarding the global economy and Spain’s need for another bailout. Reuters reported that Spain may request a bailout as early as next weekend but Germany wants Spain to wait before asking for additional aid. It was disconcerting to see unemployment rise again in Spain which is not ideal for the lackluster economy.
Stocks were relatively quiet on Wednesday as investors digested a big plunge in oil prices, a stronger than expected ADP jobs report and continued to wait for Friday’s official non-farm payrolls report. Oil prices fell as social unrest continued in Iran. The Iranian currency is in a virtual free-fall which has caused scores of people to protest in Tehran asking for a regime change. The underlying notion which helped oil fall is that if a new regime comes into Iran they will be more friendly to the west and be more inclined to pump more oil. Economic data was decent on Wednesday. The September ISM service index rose to 55.1 which topped the Street’s estimate for 53.0 and beat August’s reading of 53.7. ADP, the nation’s largest private payrolls company, said US employers added 162k new jobs last month which was above the Street’s forecast for 133k.
Thursday & Friday’s Action: Stocks Rally As Unemployment Rate Falls to A 4-Year Low:
Stocks opened higher on Thursday as investors digested a slew of data from across the globe. The European Central Bank and Bank of England both held rates steady, as expected, and said they are concerned that inflation may accelerate in the near future. Spain helped investor confidence after the country sold 4 billion euros ($5.17 billion) in bonds which was near the top end of their target. In the US, the Labor Department said weekly jobless claims rose 4,000 to a seasonally adjusted 367k. This was just shy of the Street’s forecast for 370k. Factory orders for August fell by -5.2% which beat the Street’s forecast for a decline of -6%. Later in the day, the minutest of the Fed’s latest meeting were released. The minutes showed that economic activity continued to increase at a moderate pace and employment rose slowly but the unemployment rate remained elevated. FOMC officials believe that significant additional asset purchases should not adversely affect the ability to tighten the stance of policy when doing so becomes appropriate. Before Friday’s open, the Labor Department said US employers added +114,000 new jobs last month, while the unemployment rate slid to 7.8% and hit the lowest level in 4 years. In other news, the Dow Jones Industrial Average jumped to its highest level since 2007!
Market Outlook- Confirmed Rally:
As we have said for the past several months, the market is in a confirmed rally which means the path of least resistance remains higher. The major averages are back at/near multi-year highs after a brief and healthy two week consolidation to digest their recent gains. Technically, the next level of support are April’s highs (1422 in the S&P 500) and then the 50 DMA line. Trade accordingly. As always, keep your losses small and never argue with the tape.