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The Nasdaq Is Down Over -10% In 2016,
We’re Not (We Moved To Cash in December)
Bullish Double Bottom Pattern Continues To Form
The market is trying to form the right side of a bullish double bottom pattern. The pattern will be confirmed when the major indices breakout above Feb’s high. For the week, the major indices ended the week higher but closed in the middle of their weekly range which may be a sign of short term fatigue. Last week we wrote, “stocks ended lower but near their weekly highs which suggests the market may finally bounce from deeply oversold levels. This appears to be another short term low for stocks (Not “the” low, just “a” low). The conditions are ripe for stocks to rally a bit as they work off their deeply oversold levels. Once again, the bulls showed up and defended important support for the S&P 500 (1810-1820 area). What we saw last week was another “buy tail” which is a technical term for a market opening lower and closing higher (or near the highs). We have seen this pattern a few times before and the pattern tends to set the stage for a near term rally. That’s the short term outlook.” Typically, these short term oversold rallies last a few weeks, not days. We’ll see if this one has any legs or rolls over and fails like so many other short rallies we have seen in recent months. Meanwhile, the intermediate and long term outlook still remain bleak. First, we are still operating with the notion that we are in the early stages of a new bear market for stocks so we have to be very selective moving forward. Second, it is important to note that, in bear markets, surprises happen to the downside. Third, we have to keep in mind that global central banks love interfering with markets and have distorted the playing field for years. Any strong intervention may change the playing field and lead to a stronger bounce. Until that occurs, the sellers remain in clear control. We feel it is just a matter of time until the major indices fall 20% from their 2015 highs which officially defines a bear market. Several important areas of the market are already in a bear market (defined by a decline of 20% or more from a recent high) which means it is just a matter of time until the major indices play catch up to the downside. These are some of the important areas that are already in bear market territory: Commodities, The Small Cap Russell 2000 ($IWM), Transports ($IYT), Biotechs ($IBB), Retail ($XRT), Junk Bonds ($JNK), Materials ($XLB), just to name a few.
Monday-Wednesday’s Action: Oversold Rally Anyone?
U.S. stocks rallied on Tuesday as traders returned from a long weekend. Wall Street was closed on Monday for President’s Day but stock futures were higher alongside other international equity markets. Stocks continued to bounce on Tuesday from deeply oversold levels. International stocks were higher after the latest round of bullish central bank rhetoric was announced. Mario Draghi, head of the European Central Bank (ECB), said he is ”ready to do its part” to make “the euro area more resilient.” That is his way of saying the ECB is ready to pump more money into the system (increase QE) next month if conditions worsen. Separately, China’s Central Bank wants to spend more money to stimulate their economy and they central bank is considering changing the rules (once again) to help “encourage” bank lending. Bad loans in China surged to the highest level in a decade but the central bank wants more lending to stimulate markets. The Yuan surged on Monday and enjoyed its largest single day gain in over 10 years. In the U.S. a few regional Fed presidents spoke and said largely reiterated the recent stance that the Fed remains data dependent. Oil prices were higher on Monday but fell on Tuesday after OPEC decided to hold production steady. The Street was looking for OPEC to cut production and the fact that oil didn’t cut sent oil prices plunging over 8% from its intra-day on Tuesday.Oil has only had 2 “up” days all month and remains in a steep bear market. In economic news, the U.S. Empire Manufacturing Index contracted for a seventh straight month and missed estimates. The Empire Manufacturing index fell to 16.64, missing estimates for -10. In other news, home builder sentiment fell to 58 in February, missing estimates for 61.
U.S. stocks continued their 3-day rally as the market continues to bounce from deeply oversold levels. It is important to note that new leadership still remains virtually non-existent and the market continues to be led higher by beaten down areas such as Materials ($XLB) and the Transports ($IYT). Investors digested a lot of economic data on Wednesday. Overall the data was mixed to less than stellar. MBA mortgage applications jumped to 8.2%, which was lower than the prior reading of 9.3%. The big jump came from refinancing (thanks to lower mortgage rates), not new purchases. Elsewhere, Housing starts slid by -3.8% last month while building permits slid by -0.2%. Housing starts came in at 1.099M, missing estimates for 1.175M. Building permits came in at 1.202M, compared to estimates of 1.224M. Separately, U.S. producer prices rose +0.1% last month, beating estimates for a decline of -0.2%. Core prices, which exclude food and energy, rose +0.4%, also beating estimates for +0.1%. Finally, industrial production for January grew by +0.9% beating estimates for +0.4%. Meanwhile, capacity utilization was 77.1%, beating estimates for 76.7%. Finally, E-Commerce Retail Sales rose 2.1% which was lower than the last revised reading of 3.8%. The Fed released the minutes of their last meeting at 2pm EST and, as expected, the minutes reiterated the Fed’s recent “data dependent” stance.
Stocks are relatively quiet on Thursday as the market pauses to digest the recent and very strong 3-4 day rally. Since last week’s low, the benchmark S&P 500 vaulted ~120 points or +6.6%! That is a huge move by any normal measure. In “normal” (non/Central Bank printing money days), a 10% gain for the entire year was considered “normal.” Clearly, a +6.6% rally in a 4 trading days is considered very strong and way over due to pullback to digest that move. The Organization for Economic Cooperation and Development (OECD) cut its forecast for the global economy to +3.0% in 2016, down from +3.3%. The OECD is concerned that some emerging economies by be adversely affected from the sharp exchange-rate movements we are seeing in global currencies. The report came one day after Mexico’s government surprised the street to defend their currency (peso). The European Central Bank (ECB) released the minutes of their last meeting. ECB President Mario Draghi has made it clear that the central bank is ready to “do more” in March, if needed. In other news, China’s Central Bank (PBOC) increased liquidity operations to further boost markets. The PBOC said they are conducting open-market operations every day. This was originally stated before their Lunar New Year holiday. The bank is relaxing their peg on their currency (the yuan) which allows the yuan to trade in a wider range. Stocks fell on Friday after core inflation jumped to 2.2%, over the Fed’s 2% target.
Market Outlook: A Big Top
From where we sit, this aging bull market is over or on its last breath. The last two major bull markets ended shortly after their 5th anniversary; 1994-2000 & 2002-Oct 2007. The market is deeply oversold so keep in mind the strongest rallies in history occur during bear markets (a.k.a bull traps). As always, keep your losses small and never argue with the tape. If you want help with the market, contact Adam or – Join FindLeadingStocks.com.