There is no easy way to put it- This was an ugly week on Wall Street. The major averages negatively reversed, closed lower, and broke support which is not a healthy sign. In fact, the Dow Jones Industrial Average fell everyday during the shortened holiday week as investors digested a slew of earnings and economic data. In the short term, the long overdue pullback is finally upon us. For weeks- we have written, “In the short term, the market is clearly extended and due for a another short term shallow pullback
.” That is exactly what is happening. The intermediate and longer term action remains healthy, for now. Furthermore, the bullish fundamental backdrop is still in place for stocks. The bulls are looking for two possible scenarios to occur: 1. The economy grows organically or 2. The Fed continues or increases QE to help the economy grow. Both scenarios are bullish for stocks in the near term. The biggest concern is what happens when the law of diminishing returns kicks in and all the Fed printing doesn’t help Main St or Wall St anymore? My answer is to align ourselves with what is actually happening and if and when that occurs- we’ll cross that bridge when we get there. Meanwhile, the intermediate and long term outlook remain very bullish as the major averages.
MONDAY-WEDNESDAY’S ACTION: Earnings Season Fails To Impress
The market was closed on Monday in observance of the MLK holiday. Stocks opened lower on Tuesday but closed higher. The price-weighted Dow Jones Industrial Average was dragged down by shares of Travelers (TRV) and Verizon (VZ). Both stocks fell after reporting their latest quarterly results. After the close, IBM fell after their earnings were released which added further downward pressure on Wednesday.
Stocks rallied on Wednesday helping several indices hit new record highs: The Nasdaq Composite ($COMP), Nasdaq 100 (QQQ), Russell 2000 (IWM), S&P 400 (MDY) were some of the well known indices that hit new highs for the year. Remember, as we make our way through earnings season, we pay more attention to how the market and individual stocks react to the numbers, than the numbers themselves. This technique helps us filter out the noise and focus on what matters most, price action. Shares of Coach Inc (COH) gapped down on Wednesday after reporting lackluster results. After Wednesday’s close, shares of Netflx (NFLX) gapped up 17% (almost $60) after reporting another monster quarter. In other news, Carl Icahn captured headlines after saying he is increasing his stake in AAPL and is taking a stake in EBAY. Icahn wants to separate EBAY into two parts: the core marketplace business and spin-off PayPal.
THURSDAY & FRIDAY’S ACTION: STOCKS Smacked
Stocks fell hard on Thursday, after U.S. and Chinese manufacturing came in weaker than expected. Asian stocks fell after a Chinese manufacturing gauge fell to 49.6 from 50.5, missing estimates. Meanwhile, a euro-area manufacturing index climbed to 53.9 from 52.7 in December. Finally, U.S. manufacturing growth slowed in January, according to data released by Markit. Stocks were smacked on Friday and broke below important support as sellers continued to sell stocks into the close. A slew of emerging markets were smacked as fear spread that their economies will be hurt if China’s economy slows.
MARKET OUTLOOK: Market Pulling Back
It is important to monitor this pullback to see if this turns into another shallow pullback or something more substantial. As always, keep your losses small and never argue with the tape.