Stocks Bounce on Wall Street: Resistance Shown Below For Major Averages

After a very short 2.5 week pullback, the bulls showed up and regained control of the market. So far, every pullback for the past two years has been healthy as they have been shallow in both size (shallow % decline) and scope (short in duration). As long as August’s lows hold, odds favor we are heading to new highs in the near future. Conversely, if the market sells off and takes out August’s low, then odds will favor a new leg lower will follow. As we have written for weeks, this appears to be just another shallow pullback within a larger (and very strong) uptrend. The fact that the market closed near its highs on Friday, even after the Ukraine news broke, illustrates how strong the bulls are right now.

Monday-Wednesday’s Action: Buyers Return

Stocks edged higher on Monday as fear eased a bit on the geo-political front. Another ceasefire was agreed upon in Gaza on Sunday and pro-Russian separatists in eastern Ukraine also asked for a pause in fighting. There were conflicting reports coming out of Ukraine, first news broke that a potential humanitarian mission would begin but Kiev quickly denied the report because Russia would be involved in providing the aid, among other international countries.
Stocks drifted lower on Tuesday but closed relatively flat as volume receded (a healthy sign). The big disappointment occurred in Germany, Europe’s largest economy. German investor sentiment (the ZEW report) showed that investor morale fell to its lowest since December 2012. The big drop in sentiment bodes poorly for an already weak European economy and sent a slew of European stock markets lower on the day. The Euro also fell sharply on the news.
Thankfully, the decline was short-lived. Stocks rallied nicely on Wednesday after a slew of mixed economic data was released from all corners of the globe. Japan said Q2 GDP contracted by -6.8%, compared with a forecast for a decline of -7.1%. China said retail sales jumped by a healthy +12.2% in July 2014 vs July 2013. Elsewhere, industrial production rose by 9% in June, matching estimates. In the US, business inventories rose by +0.4% but the bigger news came when U.S. retail sales were unchanged. Retail sales missed estimates and came in at the weakest reading since January. The good news is that stocks rallied nicely on the news because on average the data suggested that global central banks will maintain their accommodative (i.e. easy money) stance.

Thurs & Fri’s Action: Stocks Rally Even As Geo-Political Woes Resurface

Stocks edged higher on Thursday after investors digested the latest round of economic and earnings data. In the US, initial claims rose to +311k which topped estimates for 305k. A separate report showed that export prices, excluding agriculture, rose +0.3% in July after sliding -0.3% in the prior reading. Wal-Mart (WMT) reported numbers that were inline with estimates but lowered guidance for the rest of the year which bodes poorly for the economy. Stocks opened higher on Friday but at 10:43am EST, stocks gave up their gains and quickly turned lower after news spread that Ukraine engaged a Russian convey on its soil. After a lot of public back and forth, the market recovered most of the losses and ended in the upper half of the range for the day- which was a bullish sign.

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.