Bulls Back In Control

Stocks rallied in the third week of September after several global Central Banks across the developed world clearly reaffirmed their easy money stance. From where we sit, the primary driver of this very strong 5.5 year bull market has been easy money from global central banks. Remember the S&P 500 (SPX) has soared when QE has been in effect and fell -17% after QE 1 ended and fell -22% when QE 2 ended. It will be very interesting to see how the market reacts when QE 3 officially ends next month. At this point, the action in the market remains very healthy and, barring some unforeseen large negative event, the bulls remain in clear control. We also noted previously the bullish monthly trend of seeing the market open lower but close higher on a monthly basis. That is exactly how you want to see bull markets behave. As long as this healthy action continues- weakness should be bought until further notice.

Monday-Wed’s Action: Stocks Bounce Off Support

On Monday stocks ended mixed but there was a lot going on beneath the surface. For the first time since March/April we saw a slew of leaders fell in heavy volume. Shares of Twitter (TWTR), Facebook (FB), Weibo (WB), LinkedIn (LNKD), Yelp (YELP), Netflix (NFLX), Tesla (TSLA) and others all slid between 3 & 12%. This might just be a one off but we will continue to closely monitor the situation to see if it gets worse in the weeks ahead. Overseas, China reported its first decline in electricity production since 2009, while Industrial Production (6.9%; expected 8.8%) grew at its slowest pace since December 2008. In the U.S., Industrial Production slid by -0.1%, missing estimates for a gain of +0.3%.
Stocks enjoyed nice gains on Tuesday as the Fed began their two-day meeting. Stocks ran to session highs during a webcast on the Wall Street Journal’s website, in which journalist Jon Hilsenrath (largely believed to be a mouthpiece for the Fed) made the argument that the Federal Reserve would maintain its easy money stance. His comments could be a coincidence – and we’ll let the market decide. Other bullish news came from China. China’s central bank said it lent 500 billion yuan to the five largest Chinese banks through a special lending facility. The move is the equivalent of a 50bps rate cut to the banks’ reserve requirements which is another form of “easy money.” Global central banks are clearly doing everything in their power to stimulate both Wall St & Main St and the market is noticing.
Stocks opened higher on Wednesday as traders anticipated bullish comments from the Fed. Separately, shares of FedEx (FDX) and Lennar (LEN) both gapped up after reporting their latest quarterly results. This is bullish for Main St because FedEx is a good proxy for the overall health of the economy and Lennar is a good proxy for the stagnate housing market. In the afternoon, stocks rallied after the Fed concluded their 2-day meeting and Janet Yellen held another press conference and reiterated the Fed’s easy money stance. Separately, the “Fed put” is alive and well which means if either Wall St or Main St gets in trouble, they will step up and print more money.

Thurs & Fri’s Action: Stocks Hit New Highs

Stocks rallied nicely on Thursday as Scotland voted to stay in the UK and US economic data was mixed. Weekly jobless claims fell to 280k from 316k and beat estimates for 305k. This was the lowest reading since July and properly supports the view that the weak payroll growth seen in August is likely to be revised higher. Elsewhere, housing starts slid to a seasonally adjusted annualized rate of 956k units in August from a revised 1.117 million units in July, which missed estimates for a decrease to 1.045 million units. Building permits slid to a seasonally adjusted annualized rate of 998k, missing estimates for 1.054 million. A separate report released from the Philadelphia Fed Survey for September fell to 22.5 from 28.0 which also missed estimates for 23.5. The latest readings of U.S. Core CPI and PPI both remain tame which means inflationary pressures remain subdued. Keep in mind the Fed wants inflation to remain near 2% so any lower readings are not ideal. That, coupled with the ongoing anemic economic recovery, is why the Fed decided to leave the “considerable time” language in its latest FOMC statement. The much anticipated Ali Baba (BABA) IPO (largest in US history) finally began trading. We’ll be watching this to see if a proper IPO base develops. Until then, it’s anyone’s guess what happens.

Market Outlook: Healthy Action Continues

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.

Here are the latest 5 pullbacks and subsequent rallies in the S&P 500