Bulls Still In Control
The market ended mixed to as it pauses to digest the very strong post-brexit rally. So far, the action is normal and very healthy as the market appears to be pulling back from very extended conditions. The key now is to analyze the health of this pullback to see if this is an orderly/healthy pullback or something more severe. Remember, markets do not go straight up and it is perfectly normal to see the market pullback after a very strong rally (S&P 500 jumped ~10% since Brexit!). Looking forward, the bulls remain in control until support is breached (former chart highs: Dow 18,351 and S&P 500 2,134). The next level of support to watch after that is their respective 50 day moving average lines. Since Brexit, market pullbacks have only lasted a few days, which illustrates strong investor appetite for stocks. It would be great to see a light volume pullback into support, then see the market rally sharply after support is defended. Until support breaks, the short, intermediate and long term trend remains up for Wall Street.
A Closer Look at What Happened Last Week
Mon-Wed Action:
On Monday, stocks rallied along side oil prices on hopes of a possible supply cut. On Monday, Russian Energy Minister Alexander Novak told a Saudi newspaper that his country was consulting with Saudi Arabia and other large oil producers to take measures to stabilize oil prices. In the U.S., the Empire State Manufacturing Survey fell to negative -4.21, missing estimates for +2.5. On a more positive note, The National Association of Home Builders said its housing market index came in at 60, matching estimates. Every month, The National Association of Home Builders asks its members (home builders) to rate the general economy and provide their view on the housing market. The report has been hovering near 60 for the past few months.
On Tuesday, the market ended lower after the Yen rallied sharply overnight. The Yen is considered a risk-off asset class and tends to do well when stocks (risk-on) fall. Economic data was light. The Consumer Price Index (CPI) was unchanged which matched estimates and continues to show inflation remains a non-event right now. Elsewhere, housing starts jumped to a 5 month high of 1.211M units, beating estimates for 1.180M. Even though housing starts were strong, building permits were flat which could be a subtle sign of fatigue.
Stocks opened lower on Wednesday but closed higher after the Fed released the minutes of its latest meeting. The minutes showed that the Fed is split and is still waiting for more data to be released. When push comes to shove, they are always data dependent and keep teasing of more rate hikes at nearly every meeting for the past few years. Yet, when the rubber hits the road, they back off and do nothing.
Thur & Fri Action:
Thursday was a relatively quiet day on Wall Street as the market continues to digest the recent and strong post-brexit rally. So far, the action remains healthy as the major indices continue to move sideways and we are not seeing any heavy selling underneath the surface. Stocks opened lower on Friday as the market continued pulling back from extended levels.
Market Outlook: Stocks Are Strong
Stocks are strong. The market finally broke out of its very long trading range after Brexit and ahead of earnings season. The fundamental driver continues to be easy money from global central banks. Economic and earnings data remain mixed at best which means easy money is here to stay. As always, keep your losses small and never argue with the tape.
