Small & Mid Cap Stocks Hit New All-Time Highs

Long-Term Look At The US Stock Market
Long-Term Look At The US Stock Market

Friday, January 18, 2013
Stock Market Commentary:

Stocks are back in a confirmed uptrend and continue to rally after the fiscal cliff was averted and congress decided to put the best interest of the country ahead of their petty bickering. Stocks remain perched near resistance (2012 highs) and the action is very healthy. Looking forward, one should expect resistance (50 DMA line, downward trendline, neckline of the bullish inverse head and shoulders base, and 1448- December’s high) to now become support. The S&P 500 broke above its 2012 highs (1474) while the DJIA and Nasdaq are both below their 2012 high. 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 (Recently, the Summer rally was sparked after Draghi said he will do whatever it takes to save the Euro). More recently the euro surged earlier this month after the ECB’s latest meeting and global equities are rallying after the Bank of Japan (BOJ) said they are going to flood the system with liquidity indefinitely  So my primary theme is to pay very close attention to central banks and government action.

Monday-Wednesday’s Action: Stocks Digest Large Move

On Monday, stocks ended lower but near their intra-day highs as the market paused to digest its recent rally. Volume was below average which was healthy as it illustrates little interest from the institutional crowd. After Monday’s close, Federal Reserve Chairman Ben Bernanke told Congress to raise the debt ceiling and outgoing Treasury Secretary Timothy Geithner said the ceiling could be hit as soon as mid-February or Early March. The debt ceiling currently stands at a whopping $16.4 trillion.

There was a flurry of economic data that was released on Tuesday. Retail sales topped estimates in December and rose+0.5% last month. The Labor Department said producer prices slid by -0.2% in December which was the third straight monthly decline and topped the Street’s estimate for a decline of -0.1%. Separately, manufacturing in New York State slid to -7.8, which was the sixth-consecutive monthly decline in January. Finally, the Commerce Department said U.S. business inventories increased by +0.3% in November to a record $1.62 trillion which matched estimates.

Stocks edged higher on light volume on Wednesday as the market continued to consolidate the recent 10% rally from the November 16, 2012 near term low. After such a strong rally and a recent post-fiscal cliff gap up on  January 2, 2013, it is very healthy to see the major averages trade in a very tight range on light volume to consolidate that move. The major averages remain healthy as long as they remain above their respective 50 DMA lines (SPX 1420). Several high profile companies released their Q4 results on Wednesday and it was healthy to see the market edge high higher on the news.  Goldman Sachs (GS) and JP Morgan Chase (JPM)  both rallied after blowing out estimates.  Inflation remained in check as consumer prices were unchanged last month which matched estimates. The CPI is a good gauge for inflation which thankfully has not been a problem and has helped the Fed keep rates at deeply depressed levels which is good for risk assets (for now). The Fed’s Beige Book showed that economic activity grew moderately thanks to stronger consumer spending. Finally, sentiment among home builders was flat in January after eight months of gains.

Thursday & Friday’s Action: Stocks Are Strong

Before Thursday’s open, investors digested a slew of high profile earnings and economic data. The big news came from The Bank of Japan (the Japanese Central Bank) when they said they would print unlimited money which is bearish for the yen and bullish for equities.  This reminds me of the old trading adage: Don’t Fight The Fed. It is important to note that nearly every major central bank in the world is flooding the globe with liquidity (US, ECB, BOJ, BOE, even Switzerland’s Central Bank) and this easy money stance has helped the riskon theme. Earnings data was mixed to slightly positive. Ebay (EBAY), United Health Group (UNH), Bank of America (BAC), Citigroup (C) were among some of the well-known stocks that released their numbers before the bell. On average, economic data topped estimates helped by an improving jobs and housing market. Initial jobless claims fell by 37k to a seasonally adjusted 335k which was the lowest level since January 2008 (or a 5-year low). Meanwhile, housing starts surged 12.1% in December which allowed 2012 to be the best year for housing since 2008 and reiterated our bullish call on housing stocks that we made in Q1 2012. The Philly Fed  Index missed estimates but the market still jumped to fresh highs. Stocks were quiet on Friday as investors digested the latest round of mixed economic data. China said its economy matched estiamtes and grew by 7.9% and the preliminary reading from the University of Michigan Consumer Survey, which measures U.S. consumer sentiment, fell short of expectations.

Market Outlook: Uptrend

From our perspective, the market is back in an uptrend which bodes well for both the market and the economy, by extension. 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.” Stay tuned as we will continue to keep you one step ahead of the crowd. As always, keep your losses small and never argue with the tape.

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