The market remains exceptionally strong as nearly all pullbacks remain almost nonexistent. Last week we saw the ECB join the QE party as the benchmark S&P 500 (SPX) hit a fresh record high. To be clear, the market is very extended right now and a light volume pullback into the 50 DMA line or prior chart highs would do wonders to help the market consolidate its very strong rally. Remember, the SPX was trading like a penny stock in October (which typically ends poorly). In the first two weeks of October, the SPX plunged -8% and then turned higher on Oct 15 and soared a whopping +11% in the last two weeks. That is a huge move (both up and down) and that type of volatility after a big move (bull market is now 5.5 years old) typically does not end well. Remember, in a non-QE world, a 10% annual gain was considered healthy. So 11% in only two weeks is abnormal and very impressive. Easy money from the Fed has played a major role in sending stocks higher since the historic March 2009 bottom. The SPX soared when QE has been in effect and fell -17% when QE 1 ended and fell -22% when QE 2 ended. The Fed ended QE 3 at the end of October but the market did not fall? The reason is because the QE trade has evolved, like famous investor Mohamed El-Erian so eloquently described it last week. The Fed may have ended QE 3 but they are still adopting an “easy money” stance. Additionally, other central banks around the globe, primarily European Central Bank (ECB) and the Bank of Japan (BOJ), recently began their version of QE. That’s how the QE trade has “evolved.” Instead of just the Fed printing gobs of money everyday we now have the ECB and the BOJ printing as well. So instead of the old Fed Put (the notion that the Fed will step in and save the day if Main St or Wall St weakened), it has now shifted to the Central Bank Put and this is a huge bullish fundamental backdrop for stocks.
Monday-Wed’s Action: The Rally Continues
Stocks were quiet on Monday as the market digested its recent and very robust rally. Over the past two weeks, the benchmark S&P 500 soared 11% which is very strong. Elsewhere, crude oil continued to fall and hit fresh multi-year lows as global demand remains weak and global supply continues to grow. Saudi Arabia announced they were lowering the price of a barrel that it sells to U.S. customers and raised prices for Asian customers. The ISM manufacturing index jumped last month to one of its highest readings since 2002! The index rose to 59 from 56.6, beating estimates for a gain of 56.1.
Stocks ended mixed on Tuesday as oil prices plunged another 3% and the GOP won big in the mid-term elections. Net U.S. exports fell by $3 billion in September from -$40 billion in August. Stocks rallied on Wednesday, after Republicans officially took control of the Senate. The ADP said private employers created 230,000 new jobs in October, topping estimates. The ISM service index was less encouraging as the index slid to 57.1 in Oct from 58.6 in September. Remember that the service sector currently makes up approximately 2/3 of the U.S. economy.
Stocks closed mixed on Wednesday as traders digested Tuesday’s big win by the GOP across much of the country. Political conversations were the dominate topic across many trading desks as traders debated what will happen in D.C. over the next two years (rest of President Obama’s term). After Wednesday’s close, Ben Bernanke spoke at the Schwab Impact Conference in Denver and said it would be very difficult for the ECB to engage in QE, which we found a bit odd. Not that it would be difficult for them to engage in QE- but rather, that Bernanke decided to comment publicly on another central banks actions.
Thurs & Fri’s Action: Stocks Take a Breather
Before Thursday’s open, the European Central Bank (ECB) made it clear that they are preparing to join the QE party and expand their balance sheet. ECB President, Mario Draghi, said at his press conference that the ECB expects to continue its purchases of covered bonds and asset-backed securities at least until 2016. He also said that the ECB wants to expand its balance sheet by at least a trillion Euros to put it at a similar level that it was in 2012. They will do this by purchasing other assets such as sovereign bonds, corporate bonds, and equities. The euro fell hard on the news and the ECB’s actions supports our thesis (discussed last week) that the Fed Put has now shifted to the central bank put. Before Friday’s open, the Labor Department said U.S. employers added 214k new jobs (230k est) in October as the jobless rate slid to a 6-year low.
Market Outlook: The Central Bank Put Is Alive And Well
Remember, in bull markets surprises happen to the upside. We have also noted that the bull market is aging and may be in the process of forming a large topping pattern but that topping pattern was negated as stocks repaired a ton of technical damage in the latter half of October. 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). As always, keep your losses small and never argue with the tape.