Monday-Wed’s Action: The Rally Continues
Stocks were quiet on Monday as investors focused on the Presidential election in Brazil and the results of the latest European bank stress test. Our friends at Minyanville reported that, Incumbent President Dilma Rousseff won re-election by the tightest margin in over 60 years, taking just 51.45% of total votes but the market sold off because Rousseff’s economic policies are viewed as ineffective. The results of the ECB’s Asset Quality Review (AQR) was greatly skewed towards an undercapitalization in Italian banks. Of the 25 banks who failed the stress tests, a third were from Italy. The worst bank of them all was Banca Monte Paschi (BMPS), which may need to raise 2.4 billion Euros of debt or seek a merger. In the U.S., pending home sales for September rose a less-than-expected 0.3% from the prior month, up from a 1.0% decline. Economists had expected an increase of 1.0%. From a year ago, sales are up 3.0%.
Stocks rallied nicely on Tuesday after Central Banks in China and Sweden announced a new round of easy money policies. The People’s Bank of China announced a new round of financing and a proposal was announced for new free trade zones in China. The news helped boost Chinese stocks. Sweden’s Riksbank (their central bank) cut its main policy rate to zero from 0.25% which topped analysts estimates for a cut of 12.5 basis points. The central bank also lowered the path of future rate policy and did not rule out a currency intervention with the Krona (their currency) and are open to “non-standard measures” (a.k.a they are open to their version of QE). The Russell 2000 (RUT) closed up a very strong 2.85%. After the close, Facebook (FB) gapped down after reporting their latest quarterly results.
Thurs & Fri’s Action: Bulls Remain In Control
Stocks rallied on Thursday after the latest reading of U.S, GDP grew at 3.5% quarterly annualized pace. This easily beat estimates for a gain of 3% and bodes well for the on going economic “recovery.” The stronger than expected GDP data was largely due to an increase in government defense spending and a larger drop in net exports. The real level of gross domestic purchases remained low, which prompted many economists to lower their Q4 GDP estimates. Stocks soared on Friday after the BOJ surprised markets by increasing QE. The Nikkei (the Japanese stock market) surged and Nikkei futures hit limit up which means they could not go any higher on the day which is incredible and almost unheard of.
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). It is never a dull moment on Wall Street. As always, keep your losses small and never argue with the tape.