Stocks rallied last week as the bulls sent the major indices above important areas of resistance and within striking distance of fresh record highs. Most of the big financials rallied last week after reporting crummy numbers. This reinforces our point about focusing on the reaction, not the actual numbers. Corporate earnings are expected to fall by nearly -10% in Q1 2016 which will be the worst quarter for earnings since the financials crisis. Economic data also remains less than stellar but the very strong underlying bid in the market, that has existed since the Feb 11th low, remains in clear control.
The bullish case is simple: Since Feb 11th, there has been virtually no selling and the strong easy money trade from global central banks remains alive and well (for now). It is also bullish to see the S&P 500 make a higher high last week, meaning it took out Dec’s high which is a short term positive for the market. Right now the major indices have soared since the Feb low and are now trading just below major resistance (record highs). To a lesser extent, we also want to be mindful that most bear market rallies last between 4-10 weeks and we just finished week 9.
Gold steel and oil led on the way up. Last week, gold fell and pulled back into its 50 DMA line. There’s a big OPEC meeting on Sunday for oil. If these important areas start falling, this could be a big head fake for the major indices and could drag the market lower. We are entering the heart of earnings season over the next few weeks and want to see how the market reacts.
Just to be clear on our stance, the bulls remain in clear control of this market until any meaningful selling emerges.
Week in Review
[su_horizontal_ads]
Monday-Wednesday’s Action: Stocks Rally As Earnings Season Begins
Stocks opened higher but ended near their lows as sellers showed up in the afternoon. Before the open, rumor spread that central banks and governments should begin buying bank stocks to boost the market. Meanwhile, the US dollar fell to a fresh 9-month low which sent gold, silver and several other commodities higher. Tesla (TSLA) recalled 2,700 Model X SUVs after the company told owners not to have anyone sit in the back of the vehicle until it can replace the third-row seat backs, which could fail in an accident. In other news, Goldman Sachs ($GS) will pay $5 billion to settle federal and state probes from before the financial crisis. The Justice Department settled with GS regarding the sale of mortgage-backed securities.
Stocks ended higher on Tuesday, led by a big rally in a slew of energy stocks. Oil prices soared over 4% after news broke that OPEC was closer to freezing production. Gold, silver, oil and steel stocks have soared in recent weeks after pausing to digest the strong rally from the Feb low. Overnight, Italy created a $5.7B fund to buy bank stocks. Italian banks are sitting on €360 billion euros of bad loans. This is part of a new plan from Prime Minister Matteo Renzi to boost their lackluster economy. In other news, the IMF cut its 2017 global growth forecast to 3.5% from 3.6%. In the U.S., more misdirection came from the Fed. Federal Reserve Bank of Philadelphia President Patrick Harker said it may be prudent for Fed officials to wait for more evidence inflation before they raise rates again. Then Fed’s Kaplan Said “Fed Likely to Move in the `Not-Too-Distant Future.” This has been a common occurrence since last month’s Fed meeting.
Stocks rallied nicely on Wednesday helping the Dow Jones Industrial Average and benchmark S&P 500 jump above resistance of their latest range. Before the open, JP Morgan (JPM) reported earnings that beat greatly reduced estimates. Peabody Energy (BTU) filed for bankruptcy protection in the wake of a huge crash in coal prices. Overnight, China said exports beat estimates which bodes well for the global economy. Oil prices were quiet as the US dollar rallied. Saudi oil minister, Ali al-Naimi, said he will not cut production. This came one day after inter-fax said a production freeze would likely occur. In the U.S., retail sales fell -0.3%, missing estimates for a gain of +0.1% which strengthened the case for more easy money from the Fed.
Thursday-Friday’s Action: Financials Lead
Stocks were mostly higher on Thursday after more easy money was thrown at markets from global central banks. Overnight, Singapore surprised the Street when they unexpectedly eased monetary policy and looked to devalue their currency to stimulate growth. They are now back at emergency levels not seen since the 2008 financial crisis. Bank of America (BAC), Wells Fargo (WFC) and BlackRock (BLK) were some of the big companies that reported earnings on Thursday. BAC and BLK rallied while WFC fell. Elsewhere, the IEA lowered their forecast for global oil demand. In the U.S., Energy XXI, filed for bankruptcy which became the biggest casualty (so far) of the crude bear market. Stocks were relatively quiet on Friday as investors digested a strong weekly gain. Overnight, China said its economy grew by +6.7% in the first quarter of 2016, which came in just below China’s goal of 7%. Oil prices slid ahead of Sunday’s OPEC meeting in Doha about a possible output freeze.
Market Outlook: Easy Money Back In Play
Stocks remain very strong as there remains virtually no selling in the market. Economic and earnings data remains less than stellar but all that matters now- is easy money from global central banks.
As always, keep your losses small and never argue with the tape.
