Stocks enjoyed their 7th consecutive week as the major averages continue to march higher. As we have mentioned several times recently, in the short-term the market is extended and a light volume pullback would do wonders to restore the health of this rally. So far, these pullbacks are lasting a matter of days, which illustrates how strong the bulls are right now. The intermediate and long term outlook remains very bullish as the major averages and a slew of leading stocks continue to act very well. As we have mentioned several times this year, we are in a very strong bull market and pullbacks should be bought, not sold. Every pullback this year has been shallow in both size (% decline) and scope (weeks, not months). The primary catalyst behind this 4.5 year bull market remains easy money from global central banks. We know that the easy money is here to stay (for now). Therefore, barring some unforeseen massive decline, this bull market is alive a well. Eventually the music will end, but as a market practitioner, our only job is to align ourselves with what is actually happening, not what someone thinks will happen. That said, weakness should be bought until intermediate and longer-term technical levels are broken.
MONDAY-WEDNESDAY’S ACTION: Market Pauses After Obvious Levels Hit
Stocks opened higher on Monday, helping the DJIA and SPX hit fresh record highs and jump above 16k and 1,800 for the first time in history. Stocks turned lower in the afternoon and closed below those levels after Billionaire Investor Carl Icahn said he could see a “big drop” in stocks. He is worried that earnings at many companies are due to low borrowing costs (QE) rather than strong management or economic demand. The National Association of of Home Builders/Wells Fargo Housing Market Index, which measures home builder sentiment, was flat for November after a downwardly revised level of 54 in October.
The benchmark S&P 500 (SPX) experienced its first two day decline this month as the market spent most of the day trading in a narrow range. Before the open, Carl Icahn softened his stance and clarified that he is not calling for the market to crash- he is just hedged and has been hedged since 2009. Warren Buffet jumped into the conversation and said stocks are trading in a “reasonable zone” which means they are not over or under valued right now. After the close, Bernanke said rates can stay low for a very long time – even after the the unemployment rate drops below 6.5%. The Fed is doing its best to separate tapering (buy less than $85B/month) from tightening (raising rates).
The S&P 500 fell for the third consecutive day on Wednesday which was its longest losing streak in 8 weeks. The fact that the market hasn’t fallen for three straight days in the past two months clearly illustrates how strong the buyers are right now. The sellers emerged after the Fed minutes were released. The minutes showed central bankers are open to tapering QE in the coming months. The Fed anticipates that economic reports would “prove consistent with the committee’s outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pact of purchases in coming months.” This opened the door for a possible taper at their December meeting, which we feel is possible just not probable.
THURSDAY & FRIDAY’S ACTION: Buyers Are In Control
Stocks rallied on Thursday and snapped the three day losing streak for the SPX after a flurry of economic data was released. Weekly jobless claims fell by 21k to 323k, which beat the Street’s estimate for 335k. Inflation remained a virtual non-event after the Producer Price Index slid by 0.2% in October, matching estimates. The Philly Fed index came in at 6.5, missing estimates for 15.5. Separately, the Senate Banking Panel approved Yellen as the next Fed Chief by a 14-8 vote. Stocks continued to rally on Friday- helping the DJIA and the SPX close above 16k & 1800, respectively.
MARKET OUTLOOK: SPX Tops 1800
The market is very strong and, in the short-term, is getting more and more extended by the day. The last time the SPX rallied for 7 straight weeks was in January. After a brief and shallow pullback, it continued to rally and hit new highs a few weeks later. Please note that our goal is to remain in sync with the broader trend of the market (up or down) and not get caught up with the minutiae of changing labels on the market status very often. As always, keep your losses small and never argue with the tape.