Strong Month on Wall Street
July 2016 will be remembered in the history books as a pivotal and very strong month on Wall Street. The big news was that the Dow Jones Industrial Average and the benchmark S&P 500 both broke out of a very long 18-month sideways trading range and vaulted to fresh record highs. So far, the breakouts have held and the bulls now want to see the market race higher from here.
The bulls want to see resistance (former chart highs 18,351 and 2,134, respectively) become support as we move forward. 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. In the short term, the market is “sitting” over the past two weeks as it pauses to digest its very strong 9.2% post-brexit rally. At this point, it is perfectly normal to see the major indices “sit” for a while and digest that very strong rally.
On the Central Bank front, the major central banks are on “hold” now and did not announce more “easy money” policies in their July meetings. The focus has now shifted to their September meetings. Unless we see a massive uptick in economic data, we doubt the U.S. Fed will raise rates anytime soon.
We found out on Friday that GDP missed estimates for the entire first half of 2016. Q1 GDP was revised lower and Q2 GDP came in at only 1.2%, missing estimates for 2.6%. Since the Fed is not in a “rush” to raise rates that means the easy money trade is here to stay and, for now, that is bullish for stocks. The intermediate and long term trend remains up for Wall Street.
A Closer Look at What Happened Last Week
Monday – Wednesday Action:
Stocks fell on Monday led lower by falling energy prices. Over the weekend, the G20 said it will use ‘all policy tools’ to lift growth after the Brexit vote. Later this week, The Bank of Japan (BOJ) and The U.S. Federal Reserve are slated to meet and a slew of earnings will be announced. Central banks continue to throw everything (including the kitchen sink) at markets and for now it is working.
Stocks were quiet on Tuesday as investors digested the latest round of earnings and economic data as the Fed began its two day meeting. On average economic data was somewhat positive with some strong data coming from the housing market. Separately, earnings data continues to be mixed as earnings roulette continues (some stocks gap up and some gap down after reporting earnings).
Stocks closed higher after trading in and out of positive and negative territory on Wednesday as investors digested the latest round of economic and earnings data. Overnight, Japan fired another 28T Yen easy money missile to help stimulate their market and their lackluster economy. That came a few days before their central bank meeting on Friday.
Meanwhile, The U.S. Fed held rates steady and the latest round of earnings roulette continued. Apple (AAPL), Garmin (GRMN) and Edward Life Sciences (EW) gapped up after releasing their Q2 results while shares of Twitter (TWTR) and Coca-Cola (KO) were some of the names that gapped down on earnings. Elsewhere, pending home sales grew by 0.2%, missing estimates for a gain of 1.2%.
Thursday & Friday Action:
Stocks ended mixed on Thursday as investors digested the latest round of earnings and economic data. Economic data was mixed. Jobless claims came in at 266k, compared to the Street’s estimate for 264k. The Kansas City Manufacturing index came in at negative -6, missing estimates for positive 2. Overnight, The Bank of Japan is scheduled to announce its decision on monetary policy and Friday morning U.S. GDP will be announced. Alphabet (GOOG) and Amazon (AMZN) were some of the stocks that reported earnings after the bell.
Stocks were quiet on Friday after the Bank of Japan decided not to announce additional stimulus and U.S. GDP missed estimates. Second-quarter GDP rose by +1.2%, well below expectations for +2.6%. Additionally, Q1 GDP was revised lower to only +0.8% from the last reading of +1.1%. Earnings roulette continued as Google (GOOG) and Amazon (AMZN) gapped up after reporting earnings while Exxon Mobile (XOM) and a few other well known stocks gapped down.
Market Outlook: 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 remains lackluster at best which more easy money is here to stay. As always, keep your losses small and never argue with the tape.