Don’t Fight Central Banks 06.06.14
Mon-We: Stocks Are Strong
Stocks were relatively quiet on Monday after the ISM manufacturing index fell for a second straight month. At first, the ISM mfg report slid to 55.4, missing estimates for a reading of 55.5. After the big miss, the ISM came out and revised their number and said apologized for the “error.” Despite the miss, stocks held their ground relatively well as investors waited for a flurry of data to be announced in the days ahead.
Thurs-Fri: Print, Baby, Print
A huge lesson over the past 5 years is don’t fight central banks. Stocks soared on Thursday after the European Central Bank (ECB) took historic steps to stimulate the world’s second largest economy and combat disinflation (reduction in the rate of inflation) and prevent deflation. In historic (and very aggressive) move, the ECB cut its deposit rate to negative -0.1%. The ECB also opened a 400-billion-euro ($542 billion) liquidity channel tied to bank lending and officials will start work on an asset-purchase plan. Draghi (head of the ECB) said rates are at the lower bound “for all practical purposes” and signaled policy makers are willing to act again, if needed. Before Friday’s open, the Labor Department said US employers added 217k new jobs in May, more or less in line with estimates for 213K. The report also showed that the unemployment rate slid to 6.3%, which continues to follow the Fed’s outlook and beat estimates for 6.4%.
Market Outlook: Don’t Fight The Tape
The market is acting VERY strong right now and weakness should be bought, not sold until the market gives us a reason to change our stance. Keep in mind that this bull market is aging (turned 5 in March 2014 and the last two major bull markets ended shortly after their 5th anniversary; 1994-March 2000 & Oct 2002-Oct 2007) but until we see signs of distribution (heavy selling) the market deserves the bullish benefit of the doubt. As always, keep your losses small and never argue with the tape.