The best word to describe this market is: STRONG. Stocks continue to race higher as investors continue to focus on easy money from global central banks. Whether we have strong economic data (ex: Friday’s jobs report came in at 255k, beating estimates for 180k) or weak economic data, stocks rally. Strong earnings, weak earnings, same result, stocks rally. The market action tells us that we are in a strong bull market and weakness should be bought, not sold.
Last week, we saw Australia’s Central Bank and The Bank of England both cut rates and announce more easy money measures. On the fiscal side, Japan’s government also announced a new round of fiscal measures to push the market and the economy higher. Stepping back, stocks are still strong as the market is simply pausing to digest a very strong 5-week ~10% post brexit rally. Additionally, the big breakout in the Dow Jones Industrial Average and the benchmark S&P 500 from their long sideways trading ranges remains intact. That is a bullish sign for the market.
Looking forward, the bulls remain in control until support is breached (former chart highs 18,351 and 2,134, respectively). The next level of support to watch after that is their 50 day moving average lines. Additionally, the bulls want to see the other indices breakout and go “topside” as well. The levels to watch for are 5,232 for the Nasdaq composite and 1,296 for the Russell 2000. The fact that the market pullback only lasted a matter of days, signals strong investor appetite for stocks. Until support breaks, the short, intermediate and long term trend remains up for Wall Street.
A Closer Look at What Happened Last Week
Stocks ended mixed on Monday as oil prices continued to tank and fell below $40 a barrel for the first time since April. The Dow Jones Industrial Average posted a 6-day losing streak as it pauses to digest the recent rally. Economic data was light but a little weaker than expected. The ISM manufacturing index came in at 52.6, slightly below the Street’s forecast for 53. Meanwhile, the Markit PMI manufacturing index reading for July came in at 52.9 and construction spending for June fell -0.6%.
Stocks fell on Tuesday as the market appears to be tracing out a near term top. The major indices soared over 9% since the post brexit low and have been up 5 weeks in a row. The market is simply pulling back now to digest that recent and strong rally. It is important to note that stocks fell on Tuesday even after Japan announced its plan for more fiscal easing and Australia’s Central Bank cut rates to a record low of 1.5%.
Stocks edged higher on Wednesday. The Dow Jones Industrial Average barely snapped a 7-day losing streak after the latest round of earnings and economic data were released. ADP, the country’s largest private payrolls company, said U.S. employers added 179,000 new jobs in July, beating estimates for 165,000.The ISM service index came in at 55.5, missing estimates for 56. The Markit PMI service index also remains weak. It came in at 51.4, which was just above the boom/bust level of 50. Finally, Crude Oil rallied after the EIA Petroleum report was released. Earning roulette continued as a few stocks rallied (ICE, AIG, CERN, etc) and a few fell (KATE, QRVO, FISV, etc) after announcing earnings.
Thur & Fri Action:
Stocks were quiet on Thursday even though the Bank of England announced a large round of easy money. The Bank of England cut rates for the first time in seven years by 1/4 point to 0.25%, they are going to print 60 billion British Pounds in quantitative easing and are going to buy corporate bonds. In the U.S., jobless claims edged up to 269,000 beating estimates for 265,000. Factory orders fell to -1.5%, but beat estimates for -1.8%. Earnings continued to get a mixed bag with some stocks gapping up and some gapping down. But overall earnings are projected to be down over 2.5% which will be the 5th consecutive decline in negative earnings. Stocks soared on Friday after the government said U.S. employers added 255k new jobs in July, easily beating estimates for 180k.
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.