The major averages soared to fresh multi-year highs after the ECB announced a new bond buying program to help lower yields on troubled EU countries. From its summer low of 1266 the benchmark S&P 500 index has jumped a very impressive 13%. After such a strong move, it is normal, and healthy, to see the market pullback to consolidate that move. So far, this is exactly what is happening. All the major averages pulled back towards their respective 50 DMA lines to consolidate their recent rallies. It was also encouraging to see volume dry up as the major averages pullback. This is another healthy sign. 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 further easing from global central banks. We wrote last week that “the noose is around the ECB’s neck, not the Fed’s to act” and that is exactly what has happened.
Monday-Wednesday’s Action- Light Volume Pullback To Consolidate Recent Rally:
Stocks were closed in the US in observance of the Labor Day Holiday. On Tuesday, stocks in the US opened lower but spent the rest of the day rallying back to close mixed. The August ISM index fell to 49.6 which missed the Street’s estimate for 50 and was below the critical boom/bust line of 50. This was the fastest rate of contraction in three years which bodes poorly for the economic recovery. July construction slid by -0.9% month-over-month and missed the Street’s estimate for a gain of +0.5%. Overnight, China said its MFG index slid which confirmed the notion of a global economic slowdown that we have discussed for the past several months. Shares of Netflix (NFLX) were smacked -again- after Amazon (AMZN) announced a new deal to stream valuable content from EPIX.
Stocks ended flat on Wednesday as investors digested a flurry of economic data ahead of the big ECB meeting on Thursday. In a welcomed note, US productivity data for Q2 rose by +2.2% which topped the preliminary reading of +1.6% and the Street’s estimate for a gain of +1.8%. Meanwhile, unit labor costs for the first quarter of 2012 were revised lower from an increase of +1.7% to +1.5%. The 1.5% reading beat the Street’s estimate for 1.4%. Also before Wednesday’s open, rumor spread that the much anticipated ECB bond purchase program will pledge unlimited, sterilized buying of bonds to help reduce borrowing costs on the debt laden nations in Europe. A separate report from Europe showed that the euro zone is likely to have fallen back into a recession in Q3. Germany’s composite PMI reading fell to its lowest level since June 2009. Germany is one of the strongest economies in Europe. Separately, FedEx (FDX) lowered their guidance which adds to the recent spate of weaker-than-expected economic data we have seen across much of the world.
Thursday & Friday’s Action: ECB Helps Stocks Rally
Stocks rallied on Thursday as investors digested a slew of economic and political data. Before Thursday’s open, both the Bank of England (BOE) and the European Central Bank (ECB) held their key interest rates steady which matched estimates. ADP, the country’s largest private payrolls company, said US employers added 201,000 new jobs last month which topped the Street’s estimate and bodes well for Friday’s jobs report. The Labor Department said initial jobless claims slid by 12,000 last week. The ISM Service Index topped estimates which bodes well for the economic recovery. Before Friday’s open, the Labor Department said US employers added +96,000 new jobs last month which missed the Street’s estimate for a gain of 130,000. Meanwhile, the unemployment rate slid to 8.1%. Stocks were quiet on Friday as they paused to consolidate the recent gains.
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 above 2012 highs, especially considering how much weaker other capital markets around the world are. 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.