The benchmark S&P 500 index and Dow Jones Industrial average snapped a 6-week rally after encountering resistance near their 2012 highs. The underlying notion that has helped stocks rally has been further easing from global central banks. Some market participants are hoping that the tepid economic and earnings data we have seen recently will force at least one of the prominent central bank’s hand into another round of easing in the near future. At this point, this appears to be a normal correction however, if the selling intensifies one should quickly adjust your portfolio accordingly.
Monday-Wednesday’s Action- Stocks Hit Resistance:
Stocks were relatively quiet on Monday after a report in a German magazine said the ECB would set a limit for sovereign debt yields for certain debt-laden countries. The report also said that the ECB would step up and buy the troubled bonds if their spreads over safe-haven German bunds exceeded a certain level. Aetna (AET) said it would acquire Coventry Health Care (CVH) for $5.7 billion in cash and stock. Stocks in Europe and Asia were mixed to slightly lower on Monday.
Stocks fell on Tuesday from a logical area of resistance (their 2012 highs). Normally, prior chart highs serve as important levels of resistance which means it might take some “time” before the market can trade above them. However, the fact that the major averages are trading near their 2012 highs bodes well for this rally, the risk-on theme, and the general economy in general. Stocks negatively reversed on Tuesday (opened higher but closed lower) which typically means a change in trend is on the horizon- especially after a 6-week rally. Volume, an important component of institutional sponsorship, remains below average which is also normal for this time of year as most of market participants enjoy the last few weeks of the summer. At this point, we should note that the market is due for a little pullback and adjust our positions accordingly. However, if the bulls continue to send stocks higher we will be along for the ride.
Stocks ended spent most of Wednesday’s session in the red but managed to close mixed to slightly higher after the minutes of the FOMC meeting were released. The minutes showed that there definitely is a serious discussion between members regarding QE3. Fed officials mostly agreed that additional easing would be necessary and help support the anemic economic recovery if conditions deteriorated. That said, there was a general consensus on Wall Street that the fact that the Fed did not shun the idea means that QE3 will happen which bodes well for risk-on assets.
Thursday & Friday’s Action: EU Woes Resurface
Stocks opened lower on Thursday after investors digested the latest round of tepid economic data. The Labor Department said jobless claims unexpectedly rose to the highest level in five weeks. Jobless claims rose by 4,000 to a seasonally adjusted 372,000 which topped the Street’s estimate for a reading of 365,000 new filings. The one somewhat positive data point in the current batch of economic data was that US manufacturing edged higher in August. The “flash” US manufacturing PMI index rose to 51.9 which topped the boom/bust level of 50. The news overseas was less than stellar. The data in Europe all but confirmed that the euro-zone is in their second recession in three years. Even Germany, the region’s economic powerhouse, is beginning to feel the effects of the debt crisis. Data out of China echoed a slowing, not growing economy. China’s manufacturing index slid to a nine-month low, which reiterated the notion that the global economy is slowing, not growing. Stocks were quiet on Friday after durable goods orders topped estimates in July. The two bright spots were aircrafts and automobiles. However, when you remove transportation goods, durable goods slid and missed expectations.
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 near their 2012 highs! 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.