Bulls Defend Support…For Now
Stocks ended the week higher after the bulls showed up and defended support. The big news came from China after the government stepped in and devalued their currency to stimulate their slowing economy. The major indices remain range-bound and continue trading in their middle of their 6-7 month sideways trading ranges.The important levels to watch in the S&P 500 are 2039 (support/floor) and 2134 (resistance/ceiling). By definition until either level is broken, we have to expect this sideways action to continue. The intermediate and longer term action remains bullish as the S&P 500 is less than 3% below its record high (even with all the “negative” headlines we have seen over the past few months. From where we sit, the primary driver of this very strong and aging 6.5 year bull market has been easy money from the Fed and other central banks and we don’t think the Fed will raise rates until the data improves markedly. That is the primary reason why we haven’t see a 10% correction in the S&P 500 in over three years! So far, even with rates at zero, economic activity, measured by GDP, continues to miss estimates and deflation remains more of a threat than inflation (the Fed’s dual mandate). Why would the Fed want to raise rates when neither one of its two mandates are being met? The Fed remains data dependent so we must remain data dependent as well. We would be remiss not to note that the major indices appear to be forming a large topping pattern. If support is broken, the top will be confirmed and odds favor lower prices will follow. Until that happens, we remain range-bound.
Monday-Wednesday’s Action: China Devalues Currency
Stocks soared on Monday after more overseas news helped lift stocks. China’s Shanghai Composite jumped nearly 5% after below-consensus trade data from China was viewed as an argument in favor of more easy money. European stocks rallied on the news amid reports suggesting Greek officials and Eurozone negotiators are nearing a final agreement on a third bailout package for Greece. Precision Castparts ($PCP) surged after the company agreed to be acquired by Berkshire Hathaway ($BRKA) for $235/share.
The Dow plunged 213 points on Tuesday after China devalued their currency (yuan) in the latest effort to simulate their economy. Oil prices and a slew of other demand-sensitive commodities plunged on the news. Shares of Google ($GOOG) jumped $27 after the company announced plans for a new operating structure. Google will create a new company called Alphabet, which will replace Google as a publicly-traded entity and should make it easier to evaluate different segments of the company’s business. The NFIB small business optimism index rose to 95.4, beating estimates for 95. Nonfarm productivity rose to 1.3%, missing estimates for 1.6%. Wednesday was a major support day for the market. The major indices opened lower but closed near their highs after China devalued their currency for a second consecutive day. Wednesday was a pivotal day as it signaled a “washout” low for the major indices. In the US, The Atlanta Fed Business Inflation Expectations rose 1.8%, missing estimates for 2% which signals deflation remains more of a threat than inflation.
Thursday-Friday’s Action: Stocks Turn Higher After Big Support Day
Stocks were relatively quiet on Thursday and Friday as the major indices turned higher for the week and paused to digest Wednesday’s strong rally off the lows. China’s central bank tried to calm investor fears during overnight action by holding a press conference and said the yuan adjustment “is almost complete” and called the rumors of a 10.0% devaluation “nonsense.” One thing we have learned from studying how government’s act is that their actions are worth more than their words. Weekly jobless claims rose to 274k, missing estimates for 270k. A separate report showed that retail sales rose 0.6%, beating estimates for 0.5%. Stocks were quiet on Friday as investors digested the latest round of economic and earnings data and continued to look for signs of what the Fed’s next move will be. Producer prices rose to a seasonally adjusted +0.2% rate, beating estimates for a +0.1% gain. Industrial production rose +0.6% in July and also beat estimates for 0.4%. The University of Michigan’s consumer sentiment index edged slightly lower to 92.9 in August, missing estimates for 93.5..
Market Outlook: A Major Top?
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 (celebrated its 6th anniversary in March 2015) and the last two major bull markets ended shortly after their 5th anniversary; 1994-2000 & 2002-Oct 2007). To be clear, the central bank put is the primary driver of this entire 6.5 year bull market and when that ends, we want you to be ready. Until then, the market deserves the longer-term bullish benefit of the doubt. As always, keep your losses small and never argue with the tape. If you want exact entry and exit points in leading stocks, or access more of Adam’s commentary/thoughts on the market. Consider joining SarhanCapital.com.
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Good & Bad For The Week
Good:
Stocks rallied off the lows and ended mixed for the week
The NFIB small business optimism index rose to 95.4, beating estimates for 95
Retail sales rose 0.6%, beating estimates for 0.5%
Industrial production rose +0.6% in July and also beat estimates for 0.4%
Producer prices rose to a seasonally adjusted +0.2% rate, beating estimates for a +0.1% gain
Bad:
China’s government devalued their currency
Nonfarm productivity rose to 1.3%, missing estimates for 1.6%.
The Atlanta Fed Business Inflation Expectations rose 1.8%, missing estimates for 2% which signals deflation remains more of a threat than inflation
Jobless claims rose to 274k, missing estimates for 270k
The University of Michigan’s consumer sentiment index edged slightly lower to 92.9 in August, missing estimates for 93.5