Stocks Finally Pullback- Will It Last?
Finally, the long awaited pull back arrived on Wall Street as the major indices pulled back and snapped a very strong 5-week win streak. The pullback began when a slew of commodities started falling as the US dollar rallied. Remember, commodity stocks led the way up so they are important to watch because they could lead the way down. Stepping back, markets are very overbought and are way overdue to pullback. In the short term, we want to analyze this pullback to see if it is a healthy or unhealthy pullback. If it is a healthy pullback which would be shallow in both size (small percent decline) and scope (short in duration) we will look to do some more buying. Conversely, if it is an unhealthy pullback, heavy selling across the board, then odds favor lower prices will follow. We have several big catalysts ahead of us: end of month/end of qtr, the jobs report and then earnings season. What concerns us is that the bull market is aging by any normal measure and global markets are trading all over the map. Typically, wide and loose swings are not healthy for an aging bull market. The one major caveat continues to be easy money from the Fed and other central banks. As long as markets continue reacting well to easy money- the playing field remains distorted. Since we are so close to the end of the quarter we don’t think we will see heavy selling ahead of Thursday. We will be prepared for early April because just like last quarter stocks moved sideways after a very strong rally from a double bottom pattern and then collapsed in the near quarter. We’ll see what happens over the next few weeks. We also want to note that most bear market rallies tend to last between 4-10 weeks, we just finished our 6th week. Since easy money is alive and well- we will look to buy if more bullish setups emerge.
Monday-Wednesday’s Action: Stocks Move Edge Lower Ahead of The Long Weekend
Stocks were relatively quiet on Monday as the market paused to digest the very strong rally we have seen since the Feb 11th low. Apple unveiled a few new (lower priced) products which are aimed at capturing a broader audience. In other news, Starwood ($HOT) accepted a higher offer from Marriott International Inc ($MAR). Existing home sales fell -7.1% to 5.08M, missing estimates for 5.3M. Overnight, the governor of the People’s Bank of China was cautious about corporate debt. China’s central bank warned that the ratio of corporate debt vs gross domestic product had become too high which may become a big problem in the near future.
Before Tuesday’s open, stock futures were slightly lower after two horrific terror attacks occurred in Brussels. Flights in and out of the airport were cancelled for the rest of the day and the city suspended their transit system. U.S. stocks opened lower but buyers showed up and kept losses at a minimum as big money flowed into biotechs and other Nasdaq 100 stocks. Understandably, airline and other travel stocks fell on the news. Economic data was mixed. The Federal Housing Finance Agency (FHFA) House Price Index (HPI) rose +0.5%, missing estimates for a gain +0.6%. The PMI Manufacturing Index rose to 51.4, missing estimates for 52.4. The Richmond Manufacturing Index rose to 22, beating estimates for unchanged.
Stocks fell on Wednesday, dragged lower by falling commodity prices. Crude oil fell over -4% and broke below $40 a barrel. Gold prices tumbled over $30 dragging a slew of commodity stocks lower. The US dollar continued to rally as it bounces back from deeply oversold levels. Remember commodities tend to rally when the greenback falls and fall when the greenback rallies.
Thursday-Friday’s Action: Commodities Pullback
Stocks opened lower on Thursday but closed near their highs as the very strong underlying bid continued to show up. Economic data was mixed. Weekly jobless claims came in at 265k. Meanwhile, February durable goods orders fell -2.8%, slightly better than the Street’s estimate for -3% . Finally, the Markit flash U.S. services PMI was 51.0 in March, beating estimates for +49.8. Stocks were closed on Friday for the holiday but the government reported the latest reading on GDP.
Market Outlook: Time to Pullback?
The market was deeply oversold so keep in mind the strongest rallies in history occur during bear markets (a.k.a bull traps). As always, keep your losses small and never argue with the tape. If you want help with the market, contact us at firstname.lastname@example.org or sign up for FLS Advanced Reports.