The major averages paused last week to consolidate their recent (and robust) gains. From its summer low of 1266 the benchmark S&P 500 index has jumped a nearly 15%! After such a strong move, it is normal, and healthy, to see the market pullback, or move sideways, to consolidate that move. At this point, we would like to continue giving the market the bullish benefit of the doubt and shall err on the bullish side as long as the major averages remain above their respective 50 DMA lines. However, if the selling intensifies one should quickly adjust their portfolio accordingly. The underlying notion that has helped stocks rally has been that global central banks will step up and do everything they can to avoid the global economy and the eurozone from imploding.
Monday-Wednesday’s Action- Stocks Quietly Consolidate Recent Move
Stocks fell on Monday after the September Empire Manufacturing Survey fell to -10.4 which was its worst reading since April 2009 (1 month after the historic March 2009 low in the stock market). It is important to note that for the past several months stocks tend to fall on Monday only to recover and close the week higher by Friday. Normally, this is a bullish sign to see a market open lower and close higher (on a daily, weekly, or monthly time-frame). It is important to note that later in the day a slew of commodities were smacked for no apparent reason. Crude oil suffered a mini flash-crash as rumors spread that the US government would tap the SPR to help lower gas prices. The White House quickly denied that rumor but it was too late the damage was already done to crude and a slew of other commodities.
Stocks were quiet on Tuesday as investors digested a negative outlook from shipping giant- FedEx (FDX). Some market pundits like to use Fedex and UPS as good proxies for the broader economy. It is very important to note that both the economy and the US stock market are now above their 2008 levels. According to the World Bank, the US economy in 2007 was $13.9T, 2008 was $14.2T, 2009 was $14.58T and the latest estimate for 2011 is $15.29T. The Nasdaq is at its highest level since 2000! This basically, lays out out bullish case. Not only are we at new multi year highs in the stock market but our economy is the largest its ever been in history! Things are not that bad. The facts are clear & stocks and the size of our economy suggest we are still going higher. This is something that most people do not talk about. Stocks were quiet again on Wednesday after the latest round of housing data was released. Housing starts hit an annualized rate of 750,000 units during August which missed the Street’s estimate for 770,000. More concerning was that July’s reading was revised lower to 733,000. Meanwhile, building permits fell to 803,000 which topped the Street’s estimate for 800,000.
Thursday & Friday’s Action: Stocks Remain Perched Near Highs
Stocks ended mixed on Thursday as investors shrugged off a series of weaker-than-expected economic data from China and Europe. Overnight, China’s manufacturing activity edged a big higher in September from August’s levels but still contracted for an 11th consecutive month. Meanwhile, business activity in the euro-zone fell in September to its lowest level since January 2010. U.S. economic data was not that bad. Leading indicators edged lower in August which bodes poorly for the ongoing economic recovery. A separate report showed factory activity in the mid-Atlantic region contracted for a fifth straight month. Finally, the Labor Department said weekly jobless claims slid to a seasonally adjusted 382,000 but the four week average rose to its highest level since June. Remember, higher jobless claims are not ideal for the jobs market.
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. The major averages are currently forming a bullish two weeks tight closing pattern. It is encouraging to see all the major averages trade near their 2012 highs, especially considering how much weaker other capital markets around the world are. Technically, the next level of support are April’s highs (1422 in the S&P 500). As always, keep your losses small and never argue with the tape.