Stocks Eek Out Small Gain As EU Debt Woes Resurface


Friday, July 20, 2012
Stock Market Commentary:

Stocks and a slew of other “risk-on” assets spent most of the week rallying but fell hard on Friday as EU debt woes resurfaced. The market is back in rally-mode which suggests the path of least resistance is higher. The current rally was confirmed on the June 29, 2012 follow-through day (in the immediate wake of late June’s EU summit). At this point, investors appear to be looking past the larger macro concerns (e.g. a slowing global economy, European debt crisis, fiscal and monetary cliff in the US, et al) and looking for further stimulus from global central banks, as they continue to snap up risky assets.

MONDAY-WEDNESDAY’S ACTION- Stocks Rally On Hopes of Further Fed Action:

Stocks slid on Monday as investors digested the latest round of mixed to mostly weaker than expected economic and earnings data. Stocks fell after U.S. retail sales missed estimates and business inventories topped estimates. The Empire Manufacturing report beat estimates which bodes well for the NY area. Citigroup (C), one of the largest US banks, gained 0.6% following its mixed quarterly results. The financial giant said Q2 earnings were $0.95 which beat the Street’s estimate for $0.90. Visa (V) and Mastercard (MA) enjoyed nice gains after they agreed to settle merchant litigation totally $6.6B.

Stocks edged higher on Tuesday after Fed Chairman Ben Bernanke made it clear he still has a few more bullets left to stimulate the economy, if needed. Bernanke spent most of Tuesday and Wednesday on Capitol Hill in his semi-annual “Monetary Policy Report to the Congress.” Shares of Yahoo (YHOO) fell after the company said it hired Google’s Marissa Mayer as its new President and Chief Executive Officer. Mrs. Mayer joined Google (GOOG) in 1999, was their first female engineer, and was most recently responsible for Local, Maps, Location and other popular services for Google. News from the economic front largely matched estimates. The consumer price index (CPI) was unchanged in June which just missed the Street’s forecast for a gain of +0.1%. Core prices, which exclude food and energy, rose by +0.2%, matching estimates. Industrial production rebounded +0.4% which topped analysts’ forecast for a +0.3% gain. The strongest news came from the rebounding housing market which supports our thesis since Q4 2011 (most recently, we presented our bullish case publicly on CNBC’s closing bell on July 2). The nation’s home builders sentiment vaulted 6 points in July to 35. This was the largest monthly gain in nearly 10 years and the level, which has been moving higher all year, is now at its highest of the recovery, since March 2007! All regions report gains with strength centered in sales for the next six months.

Stocks rallied on Wednesday as Bernanke completed his two-day testimony on the Hill. The Fed’s Beige Book showed that “overall economic activity continued to expand at a modest to moderate pace in June and early July.”  Stocks rallied on hope of a continued economic slowdown which would force the Fed’s hand into another round of QE. A slew of earnings were released and so far companies are beating already lowered expectations.

THURSDAY & FRIDAY’S ACTION- Stocks Sell Off On Friday As EU Woes Flare Up:

Stocks edged higher on Thursday after a slew of economic data missed estimates and the latest round of high profile stocks reported mixed earnings data. Stocks were bid higher after a flurry of weaker-than-expected economic data increased the odds for another round of QE by the Fed. Initial and continuing claims, existing home sales, the Philadelphia Fed, and leading indicators all missed estimates which reiterates Bernanke’s comments about a softening economy. Stocks were smacked on Friday and erased most of their gains for the week as fresh EU debt concerns resurfaced.

MARKET OUTLOOK- Confirmed Rally

From our point of view, the current market is in a confirmed rally which means the path of least resistance is higher. It is somewhat encouraging to see all the major averages close above their respective 50 DMA lines. Technically, the 200 DMA line and June’s lows are the next level of support while April’s highs are the next level of resistance for the major averages.  As always, keep your losses small and never argue with the tape. If you are looking for specific help navigating this market, feel free to contact us for more information. That’s what we are here for!

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