The benchmark S&P 500 index and Dow Jones Industrial average remain perched just below their recent 52-week highs as they pause to consolidate their recent two month rally. At this point, this appears to be a normal correction however, if the selling intensifies one should quickly adjust your portfolio accordingly. The underlying notion that has helped stocks rally has been further easing from global central banks. Some market participants are hoping that the tepid economic and earnings data we have seen recently will force at least one of the prominent central bank’s hand into another round of easing in the near future. From our point of view, the noose is around the ECB’s neck, not the Fed’s to act.
Monday-Wednesday’s Action- Stocks Perched Below Resistance:
Stocks were quiet on Monday as investors waited for Bernanke’s speech from Jackson Hole on Friday. The big news over the weekend was that Apple (AAPL) was awarded $1billion after winnning its patent dispute with Samsung. It was encouraging to see the latest flurry of merger and acquisition announcements. Kenexa (KNXA) surged 41.4% after IBM (IBM) agreed to purchase the human resources management software company for $1.3 billion. Other M&A news came when Hertz Global Holdings (HTZ) announced plans to purchase Dollar Thrifty Automotive Group (DTG). The transaction, which began five years ago, values Dollar Thrifty at $2.3 billion, or $87.50 per share. In addition, Hertz has announced an agreement to sell its Advantage unit to Franchise Services of North America and Macquarie Capital. Finally, Hudson City Bancorp (HCBK) soared 15.7% after M&T Bank (MTB) said it will acquire the bank in a $3.7 billion deal.
Stocks were quiet on Tuesday as the final week of August dragged on. European stocks slid after Spain’s GDP contracted by a larger amount expected by economists. In the US, Tropical storm Isaac disrupted offshore oil production and made landfall in Louisiana. Interestingly, Wednesday marked the 7 year anniversary of Hurricane Katrina. Charles Evans, President of the Chicago Federal Reserve Bank, said the central bank should “take action now,” and buy bonds for as long as it takes to help stimulate the ailing jobs market and the broader economy.
Stocks continued to consolidate their recent move with another quiet day on Wednesday. On average, the economic news in the US was positive. The Fed’s Beige Book said “economic activity continued to expand gradually in July and early August.” This helped alleviate pressure for QE 3 and bodes well for the fragile economic recovery. The beige book compiles economic conditions from the 12 Fed districts around the country. Q2 GDP was revised up to +1.7% which topped the initial reading of 1.5% and the Street’s estimate of 1.6%. The GDP Deflator was unchanged and showed a 1.6% increase. Finally, pending home sales for July rose by 2.4% which was better than the Street’s forecast for an “unchanged” reading and June’s negative reading of -1.4%.
Thursday & Friday’s Action: Stocks End Week On A Positive Note
Stocks fell on Thursday as fresh EU woes resurfaced and hopes dimmed that Bernanke would announce QE 3 at his annual meeting in Jackson Hole on Friday. The IMF said it sees a “major challenge” in implementing emergency measures for Greece. Separately, Slovak Prime Minister, Robert Fico, suggested there was a 50% chance of a euro area breakup which rattled investors. Economic data from the US was not exciting. The Labor Department said weekly initial jobless claims count totaled 374,000, which was a little higher than the average estimate for 370,000. Meanwhile, continuing claims, fell to 3.316 million from 3.321 million. A separate report showed that personal income rose by 0.3% in July, which matched estimates. Personal spending rose by 0.4%, which was lower than the expected reading of +0.5%. Core personal consumption expenditures were flat month-over-month which missed estimates for a gain of +0.1%. Stocks rallied on Friday even though Bernanke did not announce QE 3 but left the door open for more easing in the future. The “big” news that helped stocks rally came from Europe when Spain announced the creation of a “bad” bank and a rumor spread that Bundesbank President Jens Weidmann, one of the most vocal opponents to the much anticipated ECB bond-buying plan, might resign. Bernanke, as expected, did nothing and left the door open for more easing- if needed. On average, US economic data was mixed to slightly better than expected on Friday.
Market Outlook- Confirmed Rally
From our point of view, the market is in a confirmed rally which means the path of least resistance remains higher. It is encouraging to see all the major averages trade near their 2012 highs! 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.