STOCK MARKET COMMENTARY:
FRIDAY, FEBRUARY 21, 2014
The market continues acting great considering how weak it was acting just a few weeks ago. The benchmark S&P 500 closed on Friday within a fraction of a percent below its record high (which is very healthy). Meanwhile, it was very healthy to see the Nasdaq, Nasdaq 100, Philly Semiconductor index ($SOX), and Mid Cap indices ($MDY) all hit fresh 2014 highs. So far, the action continues to support our bullish thesis that this was just another pullback within a broader uptrend. The short, intermediate, and longer term action still remain very healthy as the market simply paused to digest last year’s very strong gain. Furthermore, the bullish fundamental backdrop is still in place for stocks. Keep in mind the US economy is the largest it has ever been in history and is still growing (albeit slower than Wall Street wants). 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. Barring some unforeseen negative event, both scenarios are bullish for stocks.
Mon-Wed’s Action: Valuations Still Within Reason
In the US, stocks were closed on Monday in observance of the President’s Day holiday. Over the weekend, the headline/lead story in Barron’s suggested 4% GDP growth for 2014. If that occurs, it would justify higher prices for stocks (that is a big “IF”). Even if it is less than 4%, valuations are still not horribly extended when compared to prior significant market tops. Right now, the S&P 500’s P/E is just over 17. In 1987, and in 2007, it was near 22. In 2000, it was over 29! Bottom line, we are moving in that direction but are not there just yet. Of course, this secondary as price action always comes first in our book.
On Tuesday, stocks opened mixed as traders returned from the long weekend. It is normal to see the market pause for a little to digest its recent (and robust) rally. Since the Feb 5 1737 low, the S&P 500 soared over 6% (>100) points and definitely deserves a breather up here. Before Tuesday’s open, the Empire State manufacturing report missed estimates. Keep in mind over the next few weeks, we will likely see a flurry of weaker than expected economic data and much of it will be written off due to the weather. On Wednesday, stocks negatively reversed (opened higher but closed lower) as the market digested its latest and steep rally off the lows. Typically, a negative reversal- after an almost vertical rally- would signal a near term decline would follow. The decline lasted 1hr early Wednesday morning before the bulls showed up and quelled the bearish pressure. This illustrates how strong the bulls are right now. The S&P 500 futures were up for 11 days in a row and the $SOX (Philly Semiconductor index) rallied for 10 straight days. Additionally, by Friday’s close, the $SOX broke out of a very long 12 year base and hit its highest level since 2002!
Thurs-Fri’s Action: Stocks Are Strong
Stocks opened lower on Thursday but the bulls quickly showed up and promptly quelled the bearish pressure and sent stocks higher by the close. Shares of Facebook (FB) opened lower after the social media giant said they will acquire WhatsAPP for $19B but closed higher as buyers stepped up and sent prices to fresh record highs. Elsewhere, shares of Tesla (TSLA) soared to a new record high after the company smashed estimates. Stocks fell on Friday as a slew of options expired (caused the heavy volume).
Market Outlook: Uptrend Intact
The market is following our script perfectly. In late Jan/early Feb we wrote saying that this appears to be another normal (and healthy) pullback within a broader uptrend. That is exactly what occurred. As always, keep your losses small and never argue with the tape.