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Daily Market Commentary

Week In Review: Stocks Hold Up Well Even As Geo-Political Tensions Flare Up


Stocks Shrug Off Geo-Political Woes: 07.18.14

Stocks Are Strong

The market has had every reason in the world to fall and refuses to budge. Instead, the S& P 500 turned positive for the week and the Dow Jones Industrial Average & Nasdaq 100 both closed at new highs for the year!  That, my friends, is a definition of a bull market.  For the past 2.5 weeks, stocks have paused to digest the recent April- July rally which is very healthy and exactly what you want to see after a nice move. The benchmark S&P 500 jumped nearly 10% from April’s low (1814) thru July’s high (1985). Remember in a normal environment where Central Banks are not printing billions of dollars everyday- a 10% rally in an entire year would be considered decent. So a 10% rally in under 3 months- is very strong and the market has earned the right to take a breath up here.  
Bifurcated Market Continues
Separately, keep in mind the market has become somewhat bifurcated as the S&P 500/DJIA continue to lead while the small-cap Russell 2000 continues to lag. As previously mentioned, so far this appears to be another normal and healthy shallow pullback in both size (% decline) and scope (short duration).  Remember, shallow pullbacks are healthy as they give the market a chance to pullback and digest the recent move. 
The Fed Put Remains Alive & Well
The good news for the bulls is that nothing has changed. From a fundamental point of view, the Fed Put is alive and well (The Fed Put refers to the notion that if either Main St or Wall St fall hard the Fed will step in again and print more money – another round of QE) and the strong technical picture (price action) remains healthy. The market remains exceptionally strong in all three time-frames: short, intermediate and long. In the short term, the major averages were just extended in the short-term and overdue for a nice pullback. The best way to interact with markets is to focus on what is happening right now (known) and avoid the temptation to predict the future (which by definition, is unknown). That said, right now we are in a very strong bull market and weakness should be bought until further notice.

Monday-Friday’s Action: Consolidation Continues As Geo-political Woes Flare Up

Stocks across the globe were higher on Monday as investors awaited a busy week of corporate earnings and the latest round of M&A news was announced. Banking giant, Citigroup (C) rose after beating estimates. In M&A news, two engineering firms will unite, URS said it will be acquired by rival AECOM (ACM) for about $4 billion in cash and stock. Elsewhere, Kodiak Oil & Gas (KOG) will be gobbled up Whiting Petroleum (WLL) for $3.8 billion in stock. The deal will create the largest oil producer in the North Dakota Bakken shale region. Separately, the DJIA hit a new record high, effectively ending its latest (and very short) 1 week pullback (very bullish sign).On average, stocks slid on Tuesday after Fed Chair Janet Yellen told the Congress that she was concerned that valuations over small caps and certain biotech stocks were stretched. After an initial sell-off, stocks rebounded and most of the major averages closed near their respective highs for the day. The standout weaker index, is the small-cap Russell 2000 which remains the weakest market on a relative basis. Stocks rallied on Wednesday after stronger-than-expected economic data was released from China. Overnight, China said June Industrial Production grew at +9.2% YoY vs +9.0% expectation. Separately, China said Q2 GDP jumped by +7.5% YoY, beating estimates for a gain of +7.4%. The global economy desperately needs growth and any major economy that exhibits growth is a welcomed event for stocks.

Stocks opened were clobbered on Thursday after a flurry of negative Geo-political tension flared up. A Malaysian Passenger Jet was shot down in Ukraine, Israel sent ground troops into Gaza and finally just before the close, a rumor spread that the White House was on lock-down. Stocks had every reason in the world to fall on Friday and the fact that they didn’t bodes well for the bulls. The initial fear eased a bit and that helped buyers step up and buy stocks.

MARKET OUTLOOK: Strength Begets Strength

The market is strong. Keep in mind that this 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 distribution (heavy selling) the market deserves the bullish benefit of the doubt. As always, keep your losses small and never argue with the tape.

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