Friday, February 01, 2013
Stock Market Commentary:
The major averages are strong and the fact that they simply refuse to pullback illustrates how strong the bulls are right now. 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 March Higher
Stocks were quiet on Monday as investors digested a slew of earnings and economic data. Economic data was mixed – pending home sales fell by -4.3% in December which missed the Street’s estimate. However, the “miss” was attributed to a lack of supply which bodes well for the housing market. Elsewhere, durable goods jumped +4.6% in December which easily beat the Street’s estimate and bodes well for the ongoing economic recovery. The Dallas Fed manufacturing survey rose to 5.5 in January which beat December’s reading of 2.5. Earnings were mixed to mostly positive as a slew of large profile companies released their Q4 numbers. Remember, in addition to analyzing the actual numbers we focus more on how stocks and the market react to the numbers. So far, the action has been healthy.
On Tuesday, stocks were quiet as investors digested another round of high profile earnings reports and the latest round of economic data. The S&P Case Shiller index expanded by 4.5% which bodes well for the housing market. Consumer confidence fell to the lowest level in over a year in December as people were waiting for D.C. to resolve the Fiscal Cliff. On a separate note, so far in January, there has been a tremendous amount of new capital flowing into equities. The latest data I have shows that there has been over $25B in new capital that flowed into U.S. ETF’s and over $12.7B into U.S. mutual funds- both are higher than January 2012.
Before Wednesday’s open, a slew of economic and earnings data was released. The big surprise came from Q4 GDP which showed a decline of 0.1% compared to an expected gain of 1%. The decline was brushed off largely due to a large decline in stockpiles (ex: Inventory) and a large decline in government spending. The largest “take-away” from the report was that for all of 2012 the US economy grew by +2.2% which was better than 2011’s growth rate of +1.8%. The report also showed that the US economy added about 150K jobs a month for the past two years. Moreover, the fiscal cliff and hurricane Sandy hurt Q4 GDP and they are no longer a threat to Q1 2013 GDP. Separately, ADP said US employers added 192K new private sector jobs in January which beat the Street’s estimate for 160-175k and bodes well for Friday’s jobs report. The Fed concluded its first meeting of 2013 and reiterated their recent stance regarding their easy money policy.
Thursday & Friday: Stocks Soar To New Highs!
Stocks were quiet on Thursday as investors digested the latest round of economic and earnings data. Before the open, the Labor Department said weekly jobless claims rose by 38,000 to 368,000. Elsewhere, income and spending rose in December which helps offset the recent GDP miss. In addition, the ISM said its gauge of business activity in Chicago rose to 55.6 which topped estimates and was the highest level in a year. Stocks rallied on Friday after the Labor Department said US employers added 157k new jobs as the jobless rate rose to 7.9%. This is further away from the Fed’s target of 6.5% and alleviates the threat the Fed will stop easing in the near future.
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.