First, let me begin by restating my thesis since November 16, 2012 – Stocks are strong. The next point that needs to be addressed is that stocks are very extended in the short term and a light volume pullback would do wonders to restore the health of this rally. Ideally, we would see the major averages pull back on light volume into their prior 2012 chart highs or their respective 50 DMA lines. The real strength remains in small and mid cap stocks evidenced by new all time highs in the Russell 2000 and S&P 400 indices. The uptrend that began on Friday, November 16, 2012- (after politicians hinted that a deal would get done for the fiscal cliff) remains intact and offers an interesting lesson for investors- stocks are closely paying attention to government officials (Since the 2009 low, every major rally was sparked by government action). That said, my primary theme is to pay very close attention to central banks and government action until their policies change.
Monday-Wednesday’s Action: Stocks Continue To Rally
Thursday & Friday’s Action: Stocks Continue To Soar
Before Thursday’s open, a slew of economic and earnings data were released. The biggest story was tech-giant Apple (AAPL). The stock gapped down to a new 12 month low after reporting another lackluster quarter. By lackluster, I simply mean when one compares it to its prior umpteen quarters of high double and low triple digit sales and earnings growth. Meanwhile, weekly jobless claims slid by 5,000 to a seasonally adjusted 330,000 which was the lowest level in 5 years and bodes well for the ongoing economic recovery. It also bodes well for the monthly jobs report which is something we know Bernanke and Company are closely watching. The Fed made it clear on December 12, 2012, that they will keep rates low until the unemployment rate falls below 6.5% and inflation tops 2.5%. Remember, this not an if/or statement. They want to see both numbers hit their respective targets. Before Friday’s open, the euro jumped to a new multi-month high after confidence in Germany topped estimates and Mario Draghi, head of the ECB, said that Europe has stabilized and banks are repaying the LTRO from late 2011 and early 2012.
Market Outlook: Uptrend
From our perspective, the market is in a very strong uptrend which bodes well for both the market and the economy. 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. 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.