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Daily Market Commentary

Week In Review: Healthy Week On Wall St; Stocks Eek Out Weekly Gain & Resistance Becomes Support

Bulls Are Down But Not Out:
It was a busy week on Wall Street but after everything was said and done, the market closed slightly positive which is a healthy sign for the bulls. It was also encouraging to see the bulls show up and defend the market’s prior chart highs (see below; resistance is now support). Since the first week of July, we have been telling you that the market was way over due for a pullback. That much awaited pullback is finally occurred. The key now is to monitor the health of this pullback to see if it is another healthy/shallow pullback within a broader uptrend, or the beginning of something more ominous. Remember, large tops take time to form and if this is going to be it- the end of this aging bull market- then more time is needed before a top can form. So far, the evidence suggests this is another pullback within this very strong uptrend. Remember, the S&P 500 (SPX), DJIA and Nasdaq Composite all hit new record/multi-year highs only 2.5 weeks ago.

Monday-Friday’s Action: Sellers Remain In Control

Stocks rallied on Monday even after Banco Espirito Santo, one of Portugal’s largest banks, received bailout funds over the weekend. It largely went under the radar, but what caught our attention was that the actual need for the bailout was not disclosed. This opens the door for many questions about the health of the European banking system. We already know and have written about it in the past that European bank stocks have fallen sharply in recent months which is one reason why the ECB has taken rates into negative territory.

Stocks fell on Tuesday after geo-political and economic woes hurt stocks. Russian troops built up their presence on the Ukrainian border which added to the already tense situation in that region. On average US economic data topped estimates which sparked fear that the Federal Reserve will raise rates sooner than initially expected. The ISM said the US service industry in the U.S. expanded in July at the fastest pace since December 2005. A separate report showed that factory orders rose 1.1% in June which also topped economists’ estimates for a +0.6% gain.
Stocks edged higher on Wednesday even after more worrisome news emerged from Europe. Bottom line, Europe is in trouble (again) and its economy is not doing well. Germany, a.k.a Europe’s largest economy, said factory orders fell for the second straight month (-3.2% vs expected +1.0%) but the bigger event occurred when Italy said its economy contracted for a second straight quarter, which is the technical definition of a recession. Italian GDP slid -0.2% in Q2, following a decline of -0.1% in Q1.

Thursday & Friday’s Action: Geo-Political Woes Hurt Stocks; Selling Continues

Stocks opened higher but closed lower on Thursday after fresh concerns spread regarding Russia. NATO’s Secretary General, Anders Fogh Rasmussen, urged Russia to “step back from the brink,” withdraw its troops, and stop supporting rebels in Eastern Ukraine. Global equity markets fell after the comments as investors remain spooked regarding the geo-political risk in the region. In other news, the European Central Bank (ECB) held interest rates unchanged, matching estimates. Rates remain in negative territory after June 2014’s historical meeting. ECB President Mario Draghi reaffirmed the ECB would consider unconventional moves, such as the buying of asset-backed securities (a.k.a engage in Quantitative Easing), should its medium-term outlook for inflation change. This sent the Euro lower and signaled that the ECB is still concerned about the European economy. Stocks rebounded nicely on Friday and helped the major averages erase their losses for the week after news broke that Russia pulled its troops back from the Ukrainian border.

MARKET OUTLOOK: Time For A Breather

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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