Stocks Snap 6-Week Rally

Matter of Time Until The Next Massive Rally!

Friday, August 24, 2012
Stock Market Commentary:

The benchmark S&P 500 index and Dow Jones Industrial average snapped a 6-week rally after encountering resistance near their 2012 highs. The underlying notion that has helped stocks rally has been further easing from global central banks. Some market participants are hoping that the tepid economic and earnings data we have seen recently will force at least one of the prominent central bank’s hand into another round of easing in the near future. At this point, this appears to be a normal correction however, if the selling intensifies one should quickly adjust your portfolio accordingly.

Monday-Wednesday’s Action- Stocks Hit Resistance:

Stocks were relatively quiet on Monday after a report in a German magazine said the ECB would set a limit for sovereign debt yields for certain debt-laden countries. The report also said that the ECB would step up and buy the troubled bonds if their spreads over safe-haven German bunds exceeded a certain level. Aetna (AET) said it would acquire Coventry Health Care (CVH) for $5.7 billion in cash and stock. Stocks in Europe and Asia were mixed to slightly lower on Monday.
Stocks fell on Tuesday from a logical area of resistance (their 2012 highs). Normally, prior chart highs serve as important levels of resistance which means it might take some “time” before the market can trade above them. However, the fact that the major averages are trading near their 2012 highs bodes well for this rally, the risk-on theme, and the general economy in general. Stocks negatively reversed on Tuesday (opened higher but closed lower) which typically means a change in trend is on the horizon- especially after a 6-week rally. Volume, an important component of institutional sponsorship, remains below average which is also normal for this time of year as most of market participants enjoy the last few weeks of the summer. At this point, we should note that the market is due for a little pullback and adjust our positions accordingly. However, if the bulls continue to send stocks higher we will be along for the ride.
Stocks ended spent most of Wednesday’s session in the red but managed to close mixed to slightly higher after the minutes of the FOMC meeting were released. The minutes showed that there definitely is a serious discussion between members regarding QE3. Fed officials mostly agreed that additional easing would be necessary and help support the anemic economic recovery if conditions deteriorated. That said, there was a general consensus on Wall Street that the fact that the Fed did not shun the idea means that QE3 will happen which bodes well for risk-on assets.

Thursday & Friday’s Action: EU Woes Resurface

Stocks opened lower on Thursday after investors digested the latest round of tepid economic data. The Labor Department said jobless claims unexpectedly rose to the highest level in five weeks. Jobless claims rose by 4,000 to a seasonally adjusted 372,000 which topped the Street’s estimate for a reading of 365,000 new filings. The one somewhat positive data point in the current batch of economic data was that US manufacturing edged higher in August. The “flash” US manufacturing PMI index rose to 51.9 which topped the boom/bust level of 50. The news overseas was less than stellar. The data in Europe all but confirmed that the euro-zone is in their second recession in three years. Even Germany, the region’s economic powerhouse, is beginning to feel the effects of the debt crisis. Data out of China echoed a slowing, not growing economy. China’s manufacturing index slid to a nine-month low, which reiterated the notion that the global economy is slowing, not growing. Stocks were quiet on Friday after durable goods orders topped estimates in July. The two bright spots were aircrafts and automobiles. However, when you remove transportation goods, durable goods slid and missed expectations.

Market Outlook- Confirmed Rally

From our point of view, the market is in a confirmed rally which means the path of least resistance remains higher. It is encouraging to see all the major averages trade near their 2012 highs! 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.

Stocks End Week Mixed As Earnings Season Officially Begins

SPX- Bulls Defend 50 DMA Line

SPX- Bulls Defend 50 DMA Line

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 ended lower on Monday as investors digested disappointing economic data from Asia and Spanish yields topped the closely watched 7% level. The Chinese consumer price index (CPI) rose +2.2% year-over-year. Meanwhile, core machinery orders in Japan tanked -14.8% month-over-month which missed estimates and bodes poorly for the global economy. Yields for Spanish 10-yr debt topped 7% for the umpteenth time this year. Historically, 7% or higher is considered a danger zone for sovereign debt so we’ll have to see how this plays out. After Monday’s close, earnings season officially began when Aloca (AA) reported their Q2 results. The aluminum giant reported a loss but beat estimates. AA shares fell close to -5% on Tuesday. Remember, as we make our way through earnings season, that it is very important to not only focus on the actual earnings data but focus on how individual stocks and the major averages react to the numbers. One of our trading secrets, that has helped us outperform the market since our inception in 2004, is to focus more on how stocks react to the news, than the actual news itself. 

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. 

Stocks fell on Wednesday after the minutes of the latest Fed meeting showed that they are not interested in another round of monetary easing anytime soon. The Fed said: further policy stimulus likely would be necessary to promote satisfactory growth,”and that the Fed should study ‘new tools’ for easing.”  Several members of the FOMC are also concerned with a “significant slowdown” in China. This disappointed investors as they desperately want more easing from the Fed to help stimulate a slowing US and Global economy. Elsewhere, Brazil’s central bank cut its benchmark interest rate by 50 basis points to 8% which matched expectations. This is their latest rate cut to help stimulate their slowing economy.

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!

Become a Client