Bulls Fight To Stay In Control

Stocks ended February higher and enjoyed their 8th positive month in the past 9. For the week, stocks ended mixed to higher as the bulls fight to stay in control of this market. On Wednesday, February 20, 2013 we published a note saying, “Time For A Pullback” after the minutes of the Fed’s last meeting were released and a slew of other riskon markets began showing signs of distribution. As you know by now, from my point of view, the primary two catalysts that sent stocks higher in recent months are: The Global Stability Put (GSP, the latest buzz word from Davos) and an improving global economy.  Both of these catalysts were questioned recently: first by the minutes from the US Fed which showed that stimulus might end sooner rather than later and a slew of weaker than expected economic data reports were released. We have been saying for weeks that stocks were overdue for a pullback and our job right now is to analyze the health of this pullback. So far, this pullback has been shallow and healthy since it was only a few percentage points and less than a week long. Ideally, we would see the major averages pull back on light volume into their prior 2012 chart highs or their respective 50 DMA lines.

Monday-Wednesday’s Action: Stocks Try To Pullback

Markets opened higher on Monday even after Moody’s downgraded U.K.’s AAA rating due to weakness in the country’s medium term growth outlook. The gains were short-lived as markets reversed and closed lower after fear spread that Italy may adopt anti-austerity policies. European shares ended lower after the polls closed and initial estimates were for victory from the center-right party run by Silvio Berlusconi. A coalition party must win at least 158 of the 315 Senate seats to gain a majority in the upper house, which is needed to pass legislation. The fear index, VIX, soared 34% which spooked investors. Elsewhere, rumors spread that Banes & Noble (BKS) may be taken private.

Stocks rallied on Tuesday as investors digested a slew of economic and geo-political data. Italy remained in gridlock which put pressure on the Euro. In the US, housing stocks soared after new home sales vaulted +15.6% in January to a seasonally adjusted annual rate of 437,000 which was the highest level since 2008 and the largest monthly increase in  nearly 20 years! Elsewhere, the S&P Case-Shiller Index rose +0.9% and topped estimates for a gain of 0.5%. Prices in the 20 city index jumped +6.8% which was its best gains since 2006. Fed Chairman Ben Bernanke defended QE 3 and said that QE 3’s benefits outweigh the costs.

Stocks rallied, led by Transports, on Wednesday after investors digested a slew of economic data. Bernanke said that he doesn’t think the US unemployment rate will drop to 6% until 2016 which really means that “easy money” policy will be alive and well until then. Stocks rallied after durable goods and pending home sales pointed to economic strength, not weakness. Even though headline durable goods fell in January but excluding transports durable goods enjoyed their largest gain since December 2011!

Thursday & Friday’s Action: Bulls Quell Bearish Pressure 

Stocks rallied on Thursday after the Commerce Department said Q4 2012 GDP rose +0.1% which missed the Street’s estimate. Elsewhere, the Labor Department said weekly jobless claims fell by 22k to a seasonally adjusted 344k. Finally, the Chicago’s Purchasing Managers Index (PMI) rose t 56.8 which was an 11-month high and above the boom/bust level of 50. So far, 93% of S&P 500 components posted Q4 results with 70% topping earnings estimates according to Thomson Reuters. The data shows that the average rate has been 62% since 1994 and 65% over the last four quarters. Stocks opened lower on Friday after unemployment surged to 11.9% in the eurozone.

Market Outlook: Uptrend

The market is strong as the bulls continue to quell the bearish pressure. I’m not happy with the recent heightened level of of distribution and volatility- after a big move. 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.” 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.