The major averages soared to fresh multi-year highs after the Fed stepped up and announced a new open-ended round of QE 3. From its summer low of 1266 the benchmark S&P 500 index has jumped a nearly 15%! After such a strong move, it is normal, and healthy, to see the market pullback to consolidate that move. After a very brief and shallow consolidation (which is healthy), stocks soared to fresh multi-year highs after the Fed announced QE 3. 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 that global central banks will step up and do everything they can to avoid the eurozone and the global economy from imploding.
Monday-Wednesday’s Action- Stocks Quiet Ahead of Fed Meeting:
Stocks fell on Monday after the bears showed up in the final hour of the session. It was interesting to see weakness in several market leaders (AAPL, MLNX, GOOG, KORS, etc). Normally, after a big rally it is very normal to see leading stocks (and the major averages) pullback a little to consolidate their recent gains. The idea is to analyze the “health” of the pullback to see if it is nothing more than a normal short term pullback or the start of something more severe. Apple negatively reversed (opened higher and closed lower) after a very strong rally in recent weeks and ahead of its much anticipated product launch on Wednesday. Apple has done this in the past to shake out the weak hands before taking off and surging to fresh all-time highs. That said, the bulls remain in control of Apple as long as it continues trading above its prior chart highs near $644 (e.g. resistance becomes support). However, if that level is taken out then the latest breakout will be negated and the ramifications are more severe. Economic data was light on Monday. The Federal Reserve said consumer credit fell by -$3.3 billion in July which followed June’s reading of $6.5 billion and missed the Street’s estimate for $10.0 billion.
Stocks rallied on Tuesday after the government said the U.S. trade deficit rose to $42 billion in July as exports to Europe fell and imports from China soared to another new record. In other news, Moody’s one of the popular rating agencies, said that they were prepared to cut the U.S.’ credit rating if next year’s budget did not clearly cut the country’s debt to GDP ratio and avoid the fiscal cliff.
Stocks crawled higher on Wednesday after a German court approved the ECB’s latest bailout fund. The German Constitutional Court approved the proposed permanent euro zone bailout fund which is also known as the European Stability Mechanism (ESM) and gave their parliament veto powers over any future increases to the size of the fund. Separately, European Commission President Jose Manuel Barroso gave his annual “state of the union” address and specifically called for a federation of European states. This is a difficult concept for much of Europe to accept due to their fragmented history, culture, and various languages. But something, he believes, is needed to help curb future debt woes. Apple announced its new iPhone 5 but did not introduce a new mini-iPad. Economic data was light. Export prices, excluding agriculture, rose by 0.4% in August after they had fallen by -1.4% in July. When you exclude oil, import prices slid by -0.2% in August, which follows a 0.3% decline in July. A separate report showed wholesale inventories rose by +0.7% in July which topped the Street’s estimate for a gain of +0.3%.
THURSDAY & FRIDAY’S ACTION: ECB HELPS STOCKS RALLY
Before Thursday’s open, investors digested two economic data points. Overall producer prices increased by 1.7% in August which was more than the average estimate for a gain of 1.2%. Core prices, which exclude food and energy, matched estimates and rose by 0.2%. The Labor Department said initial jobless claims rose to 382,000 last week which was higher than the 369,000 estimate. At 12:00 EST, the Federal Reserve announced a special open-ended version of QE 3. The Fed made it abundantly clear that its primary goal is to help stimulate the economy and the ailing jobs market. Its plan is to do this by helping the housing market recover. The underlying logic is that if the housing market recovers it will help the economy and simultaneously lower the unemployment rate. Stocks rallied on Friday helped by the latest round of positive economic data. Consumer confidence rose in early September to its highest level in four months, the consumer price index edged higher but remains at bay, and retail sales topped estimates. All three data points bode well for the ongoing economic recovery.
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.