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 a stronger 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 Trade In Tight Range To Consolidate Their Recent Rally

Stocks opened lower on Monday as fresh concern spread out of Europe which set the tone for most of the week. The Euro and European stock markets fell after fear spread regarding Spain and Italy’s finances. This also sent Spanish and Italian debt higher as fear spread. U.S. economic news was light as orders for manufactured goods rose +1.8% in December which missed the Street’s estimate for a gain of 2.2%.  Stocks were quiet on Tuesday after  a slew of mixed to stronger than expected economic data came out of Europe. Private-sector activity in the euro zone contracted at the slowest rate in 10 months which bodes well for their ongoing economic recovery. Markit’s euro-zone composite purchasing managers index increased to 48.6 last month from 47.2 in December and topped the Street’s estimate for a gain of 48.2. The services PMI rose to 48.6 from a preliminary reading of 48.3.
On the downside, retail sales in the euro zone slid -0.8% which was the largest month-to-month decline in over a decade (since April 2012). Stocks were quiet on Wednesday after fear spread out of Europe. An Italian bank Banca Monte dei Paschi di Siena said it lost more than previously expected in a bad derivative trade. The bank was expected to reveal losses in excess of the EUR 720 million estimated in October 2012. Italy’s primary stock market was smacked which dragged the euro lower.

Thursday & Friday’s Action: Stocks Edge Higher

Stocks fell on Thursday after the euro, several European stock markets, and several emerging markets, slid towards or below their respective 50 DMA lines. Before Thursday’s open, the Bank of England (BOE) and the European Central Bank (ECB) both held rates steady near zero and said they want to continue to support their economies. The ECB held rates near 0.75% while ECB President, Mario Draghi, read a prepared statement about his relationship with Italy’s Banca Monte dei Paschi di Siena. Elsewhere, Fed President Charles Evans told CNBC that the central bank policy will remain accomodative until the economy improves. U,S. economic data was mixed. Productivity slid -2% in Q4 2012 which was the largest decline in nearly two years while labor costs jumped at a 4.5% rate in Q4. Unit labor costs rose at a 4.5% rate. Finally, weekly jobless claims fell 5,000 last week to a seasonally adjusted rate of 366,000 which beat the Street’s expectation for 368,000. Stocks rallied on Friday after the trade gap unexpectedly plunged which suggests Q4 2012 GDP will be positive and not negative.

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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