Stocks snapped a very strong 7-week win streak after overseas jitters coupled with imploding oil prices hurt confidence. Over the past month, we have written extensively about how this market was getting “extended/over-bought” and way overdue for a pullback of some sort. That is exactly what is happening right now. In the short-term, the path of least resistance is lower as the market remains in pullback mode (which is not the end of the world). Last week’s action was not ideal. The market erased 4-weeks of gains in only a week and a slew of stocks were hit in heavy volume. Ideally, we like to see nice, quiet, orderly, low volume pullbacks as the market rallies – not steep and sharp declines. It is also important to note that this has been a tough year for most investors and people are scared that they will give back any gains they may have as we approach year-end. This leads to “a sell now and ask questions later” mentality as people rather sell their stocks then hold them at this point. That is exactly what is happening right now. At this point, the intermediate and long term outlook remains bullish as the major averages remain in very strong uptrends.
Monday-Wed’s Action: Stocks Fall As Fear Spreads
Stocks fell on Monday after crude oil continued to fall hard and Japan’s revised its third quarter GDP lower.China said its trade balance showed exports and imports both fell. This, coupled with Japan’s lousy GDP reading, hurt demand for many commodities and the global economy. Surprisingly, China’s stock market surged a very impressive 23%, over the past 12 trading sessions after China’s Central Bank announced a new round of stimulative measures.
Stocks slid on Tuesday after more overseas jitters surfaced. Greece’s stock market tumbled 11% overnight after snap presidential elections took place. It was the largest daily decline for their stock market since 2011. People are concerned that the radical Syriza party make take over and their overall economy remains in the gutter. The old term, Grexit (Greece will exit the eurozone) resurfaced and led investors across the globe to aggressively sell Greek equities. Chinese stocks also fell hard (over 5%) as fear spread that their economy may be cooling. The Shanghai Composite surged 23% over the past two weeks and is now “pausing” to digest that very strong move! In the U.S., the Fed said that the major U.S. banks may face a capital surcharge of up to 4.5% per year over the next five years as the economy continues to “recover” from the 2008 financial crisis. Eight banks failed to meet the Fed’s criteria and may need to raise extra capital.
Stocks were hit hard on Wednesday as oil prices continued to implode and overseas jitters continued to hurt stocks. A leaked document from the ECB showed that President Mario Draghi does not have enough support from the bloc’s fiscal policymakers to embark on an expanded QE program. This sent the euro sharply higher and a slew of European equity markets lower. In other news, OPEC slashed its demand outlook for 2015 by 300k barrels-per-day to 28.7 million, just lower than the current rate of 30 million. Saudi Arabia’s oil minister was surprisingly calm about the recent drop in prices and made no move to say that the world’s largest producer would consider cutting production.
Thurs & Fri’s Action: Stocks Hit On Global Demand Woes
On Thursday, stocks rallied but closed in the lower half of the range for the day. The S&P 500 snapped a 4-day losing streak after retail sales topped estimates in November. Sales rose 0.7% in November, easily beating estimates for a gain 0.4%. Stocks fell sharply on Friday as crude oil plunged to the lowest level since 2009. Crude oil, which has been in a near free-fall for the past few months, fell hard after The International Energy Agency lowered its outlook for global demand. Economic data failed to impress. Last month, U.S. wholesale prices slid -0.2% in the producer price index after a 0.2% increase in October.
Market Outlook: The Central Bank Put Is Alive And Well
Remember, in bull markets surprises happen to the upside. 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). Until material damage occurs, this market deserves the longer-term bullish benefit of the doubt. As always, keep your losses small and never argue with the tape.