Stocks Rally On Hopes of Further Easing From Global Central Banks

Friday, July 27, 2012
Stock Market Commentary:

The bulls emerged victorious after a volatile week on Wall Street. The bears sent stocks lower during the first half of the week as EU debt woes flared up and Q3 earnings projections turned negative for the first time since 2009. However, the bulls showed up in the latter half of the week and helped stocks score their strongest 3-day advance of the year. The major catatlyst which sparked the rally was when ECB President Mario Draghi said he will do “whatever it takes to save the euro.”

Monday-Wednesday’s Action: Stocks Fall On Fear That Spain Will Need A Full Bailout & Greece Will Leave The Euro:

Stocks opened sharply lower on Monday, fueled by renewed European debt woes. European stock markets were smacked hard as fear spread that Spain would need a full sovereign bailout and that Greece may leave the euro. A slew of regional governments in Spain are set to request additional aid from the central government which sparked fear that the country will require a full-scale bailout. Spanish bond yields surged to their highest level since the euro was created in 1999! In the middle of July, Euro zone finance ministers approved terms for a loan of up to 100 billion euros for Madrid to recapitalize its banks. This news sent the euro plunging to a fresh 2-year low. US Stocks erased some of the earlier losses but still ended lower on heavy volume.

Stocks ended lower on Tuesday as EU debt fears continued to dominate the headlines. However, stocks erased earlier losses after the Fed leaked a report in the last hour of trading that said they are prepared to act as soon as next week if conditions continued to deteriorate. The FHFA said its Housing Price Index for May rose by +0.8%. Earnings data was bleak. Apple (AAPL) gapped down more than -5% in after hours after releasing their Q2 results. The last time AAPL gapped down -5% on earnings was in 2008. Netflix (NFLX) also got smacked after releasing their latest quarterly results. The company’s earnings plunged a whopping -91% ($0.11 vs. $1.26) compared to the same quarter in 2011.

Stocks ended mixed on Wednesday as investors digested the latest round of mixed earnings and economic data. The big news came from Europe (shocker, I know) when Ewald Nowotny suggested Europe’s rescue fund should receive a banking license. This helped boost confidence for the ailing Euro. In the US, new home sales missed estimates which echoed the recent theme of existing homes selling faster than new homes, as investors are scooping up bargains. Egan Jones, a small rating agency in the US, downgraded Italy’s sovereign rating to CCC+ from B+. Earnings news was a bust, shares of Apple gapped down -5% after the company missed estimates for the second time in the past year. The funniest comment I heard regarding Apple’s earnings was: Apple’s earnings= iSuck. Shares of Netflix (NFLX) also were smacked after the company’s earnings shrank by a whopping -91%.

Thursday & Friday’s Action: Stocks Soar on Hopes of Further Easing From Global Central Banks:

Risk-on assets rallied on Thursday after Mario Draghi said he will do “whatever it takes” to save the euro from imploding. The rest of the quote, which was largely overlooked, was that he will do whatever it takes within the mandate to save the euro. US economic data was mixed to mostly positive which was another net positive for stocks. Weekly jobless claims slid by -35k to a seasonally adjusted 353,000, almost a 4-year low, and bodes well for the jobs market. Overall durable goods rose by +1.6% which topped estimates for a nominal gain of +0.4%. Pending home sales missed estimates falling -1.4% in June to 99.3. Earnings largely disappointed investors as Facebook (FB), Amazon.com (AMZN), Starbucks (SBUX), and Zynga (ZNGA) all missed estimates.

Stocks enjoyed the largest 3-day advance of 2012 on Friday after reports surfaced that the Bundesbank President and ECB chief may be in discussing new easing measures to help stimulate Europe’s lackluster economy. News from the US was mixed. Consumer confidence barely  beat estimates but fell to the lowest level of the year. The initial read of Q2 GDP was 1.5% which was the lowest reading since Q3 2011. My quote to Reuters summarizes Friday’s GDP report: “The U.S. economy is growing, but today’s number was right on the fence between stronger growth and no Fed action, and weaker growth with Fed action.” 

Market Outlook- Confirmed Rally

From our point of view, the current market is in a confirmed rally which means the path of least resistance is higher. It is somewhat encouraging to see all the major averages close above their respective 50 DMA lines. 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. That’s what we are here for!

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