Stocks ended slightly lower last week as Cyprus woes briefly hurt the riskon trade. So far the action in the major averages remains very strong as the number of distribution days remains limited and the last pullback was shallow in size and scope. The S&P 500 pulled back 2.9% after the minutes from the Fed’s last meeting hinted that QE might end sooner than originally expected. The pullback lasted less than 1-week because Bernanke made it clear when he testified on the hill that the benefits of QE outweighed the costs. For months, we have been saying that we want to analyze the health of the pullback and so far the pullback was very healthy because it was short in both size and scope. Going forward, the 50 DMA lines are support for the major averages. Until they are breached, the market deserves the bullish benefit of doubt.
Monday-Wednesday’s Action: Cyprus Fears Weigh On Stocks
Thursday & Friday’s Action: Cyprus Fear Eases
Stocks fell on Thursday as the ongoing drama continued with Cyprus. The latest chatter suggested Cyprus might leave the Euro. The country’s parliament is believed to have taken measures to merge two of its largest banks and impose capital controls in an attempt to stem significant outflows. Put simply, this is not a pretty picture. Economic data in the US was mixed to mostly positive as labor conditions, leading economic indicators and the Philly Fed improved and new home sales slightly missed estimates but are continue to move in a healthy direction. Talks between Cyprus and Russia fell apart on Friday but stocks rallied as hope spread that the tiny country will be bailed out.
Market Outlook: Uptrend
The market is strong as the bulls continue to quell the bearish pressure. Until the market breaks and closes below its 50 DMA line- the bulls deserve the benefit of the doubt. As always, it is extremely important to be flexible in your approach and change when the facts change (Thank you Mr. Keynes). For those of you that are new to our work, on October 9, we said “the rally was under pressure” and then said the “rally was over” on Oct 19. Immediately after that note was published, stocks fell sharply and a lot of technical damage occurred. Then we put out a note on Friday, November 16, 2012 (the exact low for this move) titled, “Time For A Bounce” and the rest is history. Most recently, on Wednesday, February 20, 2013 we sent out a note saying, “Time For A Pullback” and a week later on Feb 27, 2013 we sent a note saying “Bulls Quell Bearish Pressure.” Stay tuned as we will continue to keep you in sync with the market and ahead of the crowd. As always, keep your losses small and never argue with the tape.