After all was said and done the bulls emerged victorious last week, defended support and regained control of the market. On a weekly basis, the S&P 500 (SPX) enjoyed a large positive and outside reversal – both healthy signs. A positive reversal occurs when the asset opens lower and closes higher. This typically signals that the sellers have dried up and the buyers have returned. An outside reversal occurs when a positive reversal occurs and both the high and the low of the current bar (enter time frame of choice, intra-day, day, week, monthly, year, etc) is larger than the prior bar (same time frame). So in this case, the S&P 500 opened lower and closed higher (positive reversal) and the weekly bar eclipsed the prior week’s bar (outside reversal to the upside). All the technical jargon aside, suffice it to say, it was a bullish week on Wall Street.
Mon-Wed’s Action: Bulls Defend Support
On Monday, stocks opened lower sending the S&P 500 below support (1988 level). Almost immediately, the bulls showed up, negated the breakdown and sent stocks higher in to the close -all healthy events. Moreover, the bulls showed up and defended the 200 DMA line which is an important area of support. The big news came from Greece, when the government toned down their aggressive anti- Eurozone rhetoric. In the U.S., President Obama finalized his 2016 budget and the latest earnings and economic data continued to be released in droves. On average, earnings data continued to beat forecasts which is a positive event. On a dimmer note, economic data missed estimates – ISM’s manufacturing index slid to +53.5 in January, down from 55.1 in December and missed estimates of 54.5. Stocks rallied nicely on Tuesday after Australia’s Central Bank (RBA) cut rates by 25bps which surprised the Street. This was the latest in a series of major central banks to cut rates and pump more liquidity into the global financial system. In the U.S., factory orders for December fell by -3.4%, which was weaker than the Street’s estimate for a decline of -2.7%. Stocks opened higher on Wednesday but reversed and closed lower. Just before the close, the ECB removed a waiver allowing Greek government debt to be used as collateral- that hurt risk assets (i.e. stocks). Earlier in the day, The People’s Bank of China (PBoC) (China’s central bank) took another “easy money step” when they cut their reserve requirement ratio. The PBoC cut its reserve requirement ratio by 50bps to 19.5% which, in practice, will inject close to 600 billion Yuan into their economy. Chinese stocks soared on the news, jumping about 5% on the day. In the U.S., the ADP private jobs report showed a net gain of 213K, missing estimates for 223K.
Thurs & Fri’s Action: Jobs Report Tops Estimates
Stocks raced higher on Thursday, helping the S&P 500 jump above its 50 DMA line after the ECB “clarified” how Greece can use their debt as collateral. The claficiation came after stock markets fell hard after Wed’s announcement. The ECB said it had extended funding to Greece’s banks through the Emergency Lending Authority (ELA) which will cover all of their financing needs (60 billion Euros). This helped allay concerns of a Grexit (Greece leaving the Eurozone) and Greece’s stock market soared over 7% on the day. On Wednesday, Greece’s stock market plunged -8.5% which is not a healthy sign (all the volatility we are seeing in asset classes across the globe). In M&A news, Pharma giant Pfizer (PFE) said they will acquire drugmaker Hospira (HSP) for $90 a share, or $15 billion. Stocks were quiet on Friday as the market digested the week’s “big” rally. The two big data points came from the U.S. jobs market and Greece. Before the open, The Labor Dept said U.S. employers added 257k new jobs in January, easily topping estimates for a gain of 230k. Meanwhile, the unemployment rate ticked up to 5.7%. In other news, Standard & Poor’s, a popular rating agency, downgraded its rating on Greece to “B-” from “B.”
Market Outlook: The Central Bank Put Is Alive And Well
Remember, in bull markets surprises happen to the upside. This has been our primary thesis since the end of 2012. We would be remiss not to note that this very strong bull market is aging (turning 6 in March 2015 and the last two major bull markets ended shortly after their 5th anniversary; 1994-March 2000 & Oct 2002-Oct 2007). To be clear, the central bank put is very strong and until material damage occurs, the stock market deserves the longer-term bullish benefit of the doubt. As always, keep your losses small and never argue with the tape.
- Nasdaq Composite +0.2% YTD
- Russell 2000 +0.2% YTD
- Dow Jones Industrial Average UNCH YTD
- S&P 500 -0.2% YTD