The Bulls Remain In Control

Stocks rallied over the shortened holiday week after the European Central Bank (ECB) fired a bazooka and the US jobs report came in weaker than expected (which means the US Fed will maintain its “easy money” stance. We would argue that the primary driver of this very strong 5.5 year bull market is easy money from global central banks. After analyzing the events from last week (below), the data suggests the “easy money” stance is here to stay for the foreseeable future (which is bullish for stocks). Separately, the 5.5 year bull market remains alive and well and almost all of the major averages are trading at or near multi-year/record highs. The Nasdaq is the strongest index in 2014 +9.7% and the Russell 2000 remains the weakest +0.6%. Stocks rallied hard in August and are now pausing to digest that move- which is very healthy and should set the stage for another leg higher. Keep in mind, there are two ways a market can pause to digest a large move- either move down or sideways. The market spent the past few days moving sideways and is now edging higher. Barring some unforeseen large negative event, the bulls remain in clear control of this market.

Monday-Wed’s Action: Stocks Pause Ahead of Busy 48 Hrs

On Monday, all markets in the US were closed in observance of the Labor Day Holiday. Meanwhile, in Europe stocks were flat after reports showed that growth in the manufacturing sector came in weaker than expected in both the Eurozone & the U.K. Eurozone PMI fell to a 13-year low as economic and geopolitical uncertainties hurt demand. Manufacturing growth also slowed in the U.K. last month. On Tuesday, stocks ended mixed after stronger than expected economic data was announced in the US. The ISM manufacturing index easily topped estimates (56.8 est) and jumped to 59 in Aug. Meanwhile a separate report showed that construction spending increased 1.8% in July. After opening lower, stocks rebounded and closed near their highs for the day (healthy sign), the Nasdaq composite actually closed higher on the day. It is important to note that weaker opens followed by stronger closes is a subtle, yet important, bullish sign. On Wednesday, stocks negatively reversed (opened higher and closed lower) after news spread that a possible ceasefire was announced between Ukraine & Russia but was later denied. After the close, Russia said it announced a ceasefire with Ukraine. Fun, I know. In the U.S., factory orders rose +10.5% in July, which missed the 11.0% estimate. Elsewhere, auto sales jumped nicely and hit an annual run rate of 17.5 million units in August. That was the best August in 8 years.

Thurs & Fri’s Action: Stocks Rally after ECB Bazooka & US Jobs Report

A lot happened on Thursday and Friday. Before Thursday’s open, the ECB fired a huge bazooka by lowering rates even further and announcing a new round of quantitative easing (QE). This is unprecedented action by a major central bank and all we can say is that we hope it ends well. Their goal is to stimulate their lackluster economy and help nudge capital into their markets. Stocks in the US, fell on the news but the big mover was the Euro vs the USD. The euro plunged after the ECB meeting and that sent the greenback sharply higher. The USD has been trading in a long trading range since 2010- so right now the move is not “alarming” but if the dollar continues to rally and the move gets out of control- that has the potential to destabilize (or adversely affect) the global economy. This is just something on our radar but for now- it is not a problem. On Friday, stocks positively reversed (opened lower and closed higher- a healthy sign) after the U.S. added 142k new jobs, easily missing estimates for a gain of 230k. Stocks rallied because the weaker-than-expected report means that the Fed will likely remain accommodative (continue printing money) for the foreseeable future.

MARKET OUTLOOK: Bulls Are In Control

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.