In the short term, the buyers are back in control after what appears to be another shallow pullback in size (% decline) and scope (weeks, not months). The major averages positively reversed for the week (opened lower and closed higher) which is typically a bullish sign. For weeks- we have written, “In the short term, the market is clearly extended and due for another short term shallow pullback.” That is exactly what happened. From our point of view, the intermediate and longer term action still remains very healthy. Furthermore, the bullish fundamental backdrop is still in place for stocks. The bulls are looking for two possible scenarios to occur: 1. The economy grows organically or 2. The Fed continues (or increases) QE to help the economy grow. Both scenarios are bullish for stocks in the longer term. The biggest concern is what happens when the law of diminishing returns kicks in and all the Fed printing doesn’t help Main St or Wall St anymore? My answer is to align ourselves with what is actually happening and if and when that occurs- we’ll cross that bridge when we get there. Meanwhile, the intermediate and long term outlook remain very bullish as the major averages.
MONDAY-WEDNESDAY’S ACTION: Buyers Regain Control
The market fell hard on Monday sending the major averages below critical levels of support after a key US manufacturing report missed estimates. The benchmark S&P 500 broke below support 1767 (which has been support since December). In addition, the Dow Jones Industrial Average broke support and also broke below its 200 DMA line. Since September 2012 (when Q3 began), there has been a very strong correlation between the U.S. stock market and Japan’s stock market. The primary reason is because the U.S. & Japanese Central Banks are the two most aggressive central banks (i.e. printing the most money) in the developed world. Earlier today, the Nikkei fell 10% from its 2013 high and is now officially in “correction” territory, even as Japan’s central bank continues to print billions of dollars everyday. Keep in mind a 10% decline in the S&P 500 would be 1665.
Stocks bounced on Tuesday after economic data stabilized. Factory orders slid by -1.5%, beating estimates for a decline of -1.8%. Retailer Michael Kors (KORS) experienced a huge break-away gap after reporting earnings. Wednesday marked a near term low for stocks as buyers showed up, defended the 150 DMA line (~30 WMA) and regained control of this market. The market tried to hit a new low but buyers quickly showed up and quelled the bearish pressure which set the stage for a strong rally over the next few days. Stocks were quiet after the latest round of economic data was released. Before the open, ADP, the country’s largest private payrolls company, said US employers added 175k jobs in January which just missed estimates of 180k. Separately, the ISM service index came in at 54.0 in January, beating estimates.
THURSDAY & FRIDAY’S ACTION: Stocks Rally After Jobs Report
Stocks rallied sharply on Thursday and Friday as fear eased about a global slowdown. On Thursday, briefing reported that: “Yen weakness also factored into the advance as the retreat of the Japanese currency calmed fears about some participants being forced out of yen-based carry trades due to strength in the funding currency. The dollar/yen pair ended the New York session right above 102.00 after starting the day near 101.20.” Before Friday’s open, the Labor Department said US employers added 113k jobs in January, missing estimates of 185k. Meanwhile, the unemployment rate slid to 6.6%, beating estimates for 6.7%.
MARKET OUTLOOK: Uptrend Defended
So far this appears to be another normal shallow pullback within a broader uptrend. As always, keep your losses small and never argue with the tape.