Stocks pulled back last week to consolidate the latest and very strong rally. The S&P 500 vaulted 7% from Feb’s low of 1980 to Feb’s high of 2119. Remember, in “normal” (non Easy Money) days, a 10% rally for the entire year was welcomed. So clearly 7% in under a month is a strong run and the market has earned the right to pullback and digest that move. That is exactly what is happening on Wall Street and so far the action remains healthy (for now). The S&P 500 just pulled back into its 50 DMA which should be a near term area of support. Also keep in mind that in very strong bull markets (present market included) weakness should be bought, not sold (i.e. buy the bounce after the dip).
Mon-Wed’s Action: Nasdaq Flirts With 5k
Stocks rallied on Monday helping the tech heavy Nasdaq composite to briefly top 5,000 for the first time in 15 years. This is nothing more than a “round” number that garners headlines. Underneath the surface, the action remains healthy and valuations still remain fairly attractive. Economic data was mixed. Personal Income and Spending, Construction Spending and the ISM Manufacturing Index all missed estimates. Meanwhile, the PCE Deflator, which the Fed uses to gauge inflation, increased to +1.3% year-over-year, which matched estimates. On a positive note, the Markit US Manufacturing PMI rose to 55.1, beating the 54.3 consensus. In other news, China’s central bank cut its benchmark lending and deposit rate by 25 basis points to help stimulate their economy. Stocks fell on Tuesday after the Nasdaq briefly topped 5k. Sentiment is getting rather bullish of late which typically signals a near term pullback is in the cards. The ISE Index, the AAII Sentiment Survey, and the Investors Intelligence Sentiment Index are all showing a lot more bulls than bears right now. Separately, the February ISM New York Index improved to 63.1 from last month’s 44.5 reading. Meanwhile, the IBD/TIPP Economic Optimism Index increased to 49.1 in March, beating estimates of 47.8. Stocks were quiet on Wednesday after India’s Central Bank surprised investors and cut its benchmark and repurchase rate by 25 basis points. In the U.S., the ADP said private employers added 212k new jobs in Feb, missing estimates for 219k. The ISM service index beat estimates and rose to 56.9. The February Markit Composite PMI also beat estimates. Finally, the Fed’s Beige Book was mostly positive which bodes well for the ongoing recovery.
Thurs & Fri’s Action: Stocks Fall After Jobs Report Tops Estimates
Stocks edged higher on Thursday after the European Central Bank (ECB) ended its latest meeting and the world waited for Friday’s jobs report. As expected, the ECB did not change its interest rate policy but the euro was crushed after Mario Draghi announced that the ECB would begin its quantitative easing program on Monday and said that the ECB will likely purchase €60 billion in assets per month until September 2016. He also said that the program could go on longer should disinflationary trends continue. Draghi and company also raised their growth forecasts to +1.5% in 2015, up from 1.0% previously. Stocks fell on Friday even after Feb’s jobs report beat estimates. The government said US employers added 295k new jobs in Feb, easily beating the Street’s estimate for 240k. The unemployment rate slid to 5.5% while hourly wages rose by 0.1%. The big headline raised forecasts that the Fed will raise rates in June, rather than September which spooked markets. In other news, Apple Inc (AAPL) will replace AT&T in the Dow Jones Industrial Average.
Market Outlook: The Central Bank Put Is Alive And Well
Remember, in bull markets surprises happen to the upside. This has been our primary thesis since the end of 2012. We would be remiss not to note that this very strong bull market is aging (celebrating its 6th anniversary in March 2015) and the last two major bull markets ended shortly after their 5th anniversary; 1994-March 2000 & Oct 2002-Oct 2007). To be clear, the central bank put is very strong and until material damage occurs, the stock market deserves the longer-term bullish benefit of the doubt. As always, keep your losses small and never argue with the tape.