Rates Jump; Stocks Fall



Stocks fell after interest rates soared last week as fear spread regarding when the Fed will taper. There are a few subtle signs that this market is getting weaker, not stronger. The benchmark S&P 500 and Dow Jones Industrial Averages  both sliced below their respective 50 DMA lines which is not ideal for the bulls. The tech-heavy Nasdaq composite and Nasdaq 100 closed above their 50 dma lines thanks in part to Apple’s strong advance. Additionally, the major averages could not defend May’s high (former resistance). Several leading stocks fell in heavy volume which is not ideal for the bulls. At this point, we know the Bernanke Put (or global Central Bank easy-money put) is getting weaker by the day (as we inevitably get closer to when the Fed will taper).

1987 vs 2013: A Quick Look

It is important to note that Jan-Aug 2013 looks eerily similar to Jan-Aug of 1987. We are not there yet but something we are watching closely. Here are a few facts for your review: In 1987, the S&P 500 soared over 30% from Jan-Aug. So far, in 2013, it vaulted 20% during that period. In 1987, the S&P 500 topped out at the end of August then broke below its 50 DMA line in September. Then support was broken on Oct 14, 1987 when it took out its recent lows – just above 308 (& no that is not a typo!). Then it broke and closed below its 200 DMA line on October 15th. The following Monday was “Black Monday” where the S&P 500 lost an incredible -15% in one day! We are not sure how the rest of 2013 plays out but we will be on the look out for further weakness.


Stocks were quiet on Monday as investors digested a relatively quiet day on both the earnings and economic front. Overnight, Japan said its economy grew by a 2.6% annual rate in Q2 which missed the Street’s estimate for a gain of 3.6%. This bodes poorly for Japan’s desired stimulus effects because their central bank is printing nearly $4 billion per day and has done everything in their power to crush the yen (to help exports). Shares of Apple (AAPL) jumped after an International Trade commission decided to issue an import and sale ban on some of Samsung’s devices after the company infringed on Apple patents. Perhaps the big news on Monday was the very powerful action in Gold & Silver and Gold/Silver stocks.
Stocks rallied on Tuesday after Atlanta Federal Reserve President Dennis Lockhart said the recent mixed economic data “do not present a clear picture” for the Fed to taper in September. U.S retail sales rose 0.2% in July which missed the Street’s estimate for a gain of 0.3%. Business inventories were flat in June which missed the forecast for a gain of 0.2%. The Nikkei jumped nearly 3% after Mr. Abe, Japan’s Prime Minister, said we wants to look into lowering the corporate tax rate to help stimulate their economy. Elsewhere, shares of AAPL jumped above its respective 200 DMA on heavy volume after Carl Icahn tweeted that he owns a large position in the stock. At 2:21pm EST Ichan tweeted, “We currently have a large position in APPLE. We believe the company to be extremely undervalued. Spoke to Tim Cook today. More to come.” Then at 2:25pm EST he tweeted, “Had a nice conversation with Tim Cook today. Discussed my opinion that a larger buyback should be done now. We plan to speak again shortly.” Welcome to our new world where 1 tweet can create or destroy billions of dollars in market cap for a company.
Stocks were quiet on Wednesday after news broke that the eurozone exited its longest recession in 40 years which bodes well for the global economy. In the US, producer prices were flat in July which puts little pressure on inflation. The weaker-than-expected inflation data suggests the Fed is not ready to taper just yet, since they want to see inflation hit 2% before they taper/end QE.

THURSDAY & FRIDAY’S ACTION: Rates Spike; Stocks Fall

Stocks were hammered on Thursday as interest rates spiked to the highest level in 2 years. The DJIA broke below its 50 dma line which is subtle sign of weakness, not strength. Meanwhile, gold and silver surged after data came out that showed Paulson and other large and prominent gold bulls slashed their holdings in GLD last quarter. Economic data was mixed. Weekly jobless claims slid to 320k which beat estimates (339k) and was the lowest level since October 2007. Industrial production was flat in July, missing estimates. The Philly Fed’s Business Outlook slid from 19.8 in July to 9.3 in August which missed the Street’s estimate for 10. Finally, consumer prices rose 0.2% in July, matching estimates. Stocks were relatively quiet on Friday as investors digested the latest round of less than stellar economic data. Consumer sentiment slid to 80 in August from 85.1 in July and missed estimates of 85.5. Finally, housing starts rose 5.9% to a seasonally adjusted rate of 896k, which missed the Street’s estimate for 900k.

MARKET OUTLOOK: Bears Are Getting Stronger

The market is getting weaker now that several of the major averages closed below their respective 50 DMA lines and interest rate sensitive areas of the market are getting hammered. Defensive is paramount until the major averages regain their 50 dma lines. Our goal is to remain in sync with the broader trend of the market (up or down) and not get caught up with the minutiae of changing labels on the market status very often. As always, keep your losses small and never argue with the tape.




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