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Daily Market Commentary

Week In Review: August 2014; Very Strong Month For Stocks

The Market Is Not Expensive Even As The Market Melts- Up

August 2014 went down in history as a very strong month for US stocks. The 5.5 year bull market remains alive and well and almost all of the major averages hit new multi-year or record highs in August. At the beginning of August, we saw another brief, healthy, and shallow pullback in both size (mild -4.3% decline in the SPX) and scope (only lasted 2.5 weeks) before the bulls regained control and sent stocks up >+5% in 3 weeks. The fact that this was another healthy and shallow pullback illustrates how strong the bulls are right now. It is important to note that stocks just rallied 5% in 3 weeks and are due for a little pullback. It is important to note that there are two ways a market can pullback- either move down or sideways. Right now, the market has spent the past few days moving sideways which is the more bullish scenario. Barring some unforeseen large negative event, the bulls remain in clear control of this market.

Monday-Wed’s Action: Stocks Take A Breather After A Big Rally

Stocks opened higher on Monday, helping the S&P 500 briefly cross above the psychologically important 2,000 level for the first time ever. Separately, the latest round of M&A news was announced, Swiss drug maker Roche (RHHBY) agreed to acquire InterMune (ITMN) for $74.00 per share, representing a 38.0% premium to Friday’s close. Shares of ITMN surged +35.4%, which helped lift the iShares Nasdaq Biotechnology ETF (IBB) to its best level since late February. Interestingly, the IBB vaulted a very impressive 10% in August! The IBB also hit a new all-time high which bodes well for the ongoing bull market. Economic data was light. New Home Sales slid by -2.4% to 412k missing, the 427k estimate. Stocks edged higher on Tuesday as investors digested the latest round of economic data. Consumer confidence rose to 92.4 in August, exceeding estimates of 89. The S&P/Case Shiller index showed that U.S. home prices rose at a slower rate in the year ending in June. The index showed that home prices rose by +8.1% (est +8.3%) in June 2014 vs June 2013. Meanwhile, durable goods soared to +22.6% in July, easily beating estimates for a gain of 7%. Stocks were quiet on Wednesday on very light volume as the S&P 500 continued trading near the 2,000 level. Interestingly stocks held their ground even as tensions resurfaced between Ukraine & Russia.

Thurs & Fri’s Action: Stocks Trade Near Highs

Stocks slid a little on Thursday as the market digested its latest move and investors digested the latest round of economic and earnings data. Weekly jobless claims slid by 1k to 298k which is bodes well for the job market. Elsewhere, the Commerce Department said the U.S. economy grew by +4.2% in Q2 2014, compared to the initial estimate of +4%. The stronger than expected economic data supports the notion that the economy will grow in the second half of the year. A separate report showed that pending home sales rose by 3.3% in July. Stocks rallied on Friday even after the United Kingdom raised their terror threat for the first time in years. The fact that the market closed near its highs is a subtle but very strong sign for this ongoing 5.5 year bull market


The two best words to describe this market are “melt up.” Keep in mind that the 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 sustained distribution (heavy selling) the market deserves the bullish benefit of the doubt. Furthermore, the S&P 500 has not experienced a 10% correction since 2012 which is longer than most historical comparisons and illustrates how strong this bull market is. As always, keep your losses small and never argue with the tape.

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