Bulls Are Back In Control

After a very short 2.5 week pullback, the bulls showed up and regained control of the market. The pullback has ended now that the S&P 500 (SPX) and the Nasdaq composite have both hit new highs for the year. The DJIA & Russell 2000 are trading just below their record highs. The fact that this was another healthy and shallow (in size and scope) pullback illustrates how strong the bulls are right now. At its deepest, the SPX only fell -4.3% (size) and only lasted 2.5 weeks (scope). In the short term, the market is a little extended to the upside and a light volume pullback would be welcomed.
Monday-Wed’s Action: Buyers In the Driver’s Seat
Stocks enjoyed healthy gains on Monday as investors showed up as geo-political fears eased and the latest round of M&A news was announced. Thankfully, the situation in Ukraine eased materially over the weekend as cooler heads prevailed. Separately, the tension between Israel and Gaza has also abated. In M&A news, Dollar General (DG) jumped after the company offered $8.95 billion for Family Dollar (FDO), competing against Dollar Tree (DLTR bid earlier this month. The Nasdaq Composite jumped to a fresh 2014 high and hit the highest level since 2000, leaving it ~11% below its record high set in March 2000. 
Stocks rallied on Tuesday as bulls continued buying stocks. Home Depot (HD) rallied after reporting earnings which bodes well for the housing market and the broader economy. Shares of Apple Inc (AAPL) rallied and hit a new record high after their 7 for 1 split earlier this year. Inflation data was mild. The consumer price index rose +0.1% in July following a +0.3% increase in June. The data matched estimates which suggests inflation is still not a threat. A separate report showed that housing starts rose by a healthy +15.7% in July to 1.093 million, topping estimates for 964k.
Stocks were quiet on Wednesday as investors digested Monday and Tuesday’s rally. The minutes from the Fed meeting showed they remain “data dependent” and are open to any possible outcome- but their primary goal is to continue to support the economy, if needed. So the Fed put (the notion that the Fed will step up and flood the system with more liquidity if conditions deteriorate) remains alive and well.
Thurs & Fri’s Action: Stocks Trade Near Highs For The Week
Stocks rallied on Thursday as investors digested the latest round of economic data. Existing home sales rose to 5.15M, topping estimates for 5M. This was the fastest pace in nearly a year. The Conference Board’s Leading Economic Index also rose to +0.9% in July. A separate report showed that US manufacturing activity in August topped expectations, and the Philadelphia Fed’s business activity index rose to 28.0 in August from 23.9 in July. In China and the Eurozone, manufacturing PMI data missed estimates which does not bode well for either economy. Stocks were quiet on Friday as investors digested the week’s move and Janet Yellen said the Fed will remain on track and continue to support the economy, if needed.
MARKET OUTLOOK: New Highs
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.