Week In Review: Don’t Fight Central Banks

Don’t Fight Central Banks 06.06.14

The bulls emerged victorious in the first week of June sending the benchmark S&P 500 (SPX) and several other popular averages to fresh highs. For the first 5.5-months of this year the market built a large bullish continuation base to digest 2013’s very strong rally (29%). Now that the SPX broke out of that base, the bulls are back in control and remain in control as long as the SPX continues trading above 1897 (resistance should now become support). At its deepest this year, the S&P 500 only fell -6% below its record high which is very impressive. In fact, we have not had a 10% pullback in the benchmark S&P 500 in two years which speaks volumes to how strong this market is right now.

Mon-We: Stocks Are Strong

Stocks were relatively quiet on Monday after the ISM manufacturing index fell for a second straight month. At first, the ISM mfg report slid to 55.4, missing estimates for a reading of 55.5. After the big miss, the ISM came out and revised their number and said apologized for the “error.” Despite the miss, stocks held their ground relatively well as investors waited for a flurry of data to be announced in the days ahead.

On Tuesday, stocks ended lower causing the S&P 500 to snap a 3-day win streak.  Stocks continued trading in a relatively tight range as they consolidated their recent gains (which is healthy) and investors waited for a slew of data to be released (namely, ADP, ECB, & Jobs report). The small cap Russell 2000 continued to lag its peers as the index has yet to recover. Economic data was light, April factory orders rose 0.7%, beating estimates for a gain of 0.5%.
Stocks were quiet on Wednesday as investors digested a slew of economic data. Before Wednesday’s open, ADP, the country’s largest private payrolls company, said US employers added 177k new jobs in May, missing estimates for 215k. On a more positive note, the ISM service index beat estimates and grew by the fastest pace since March 2012, up to 56.3 in May vs estimates for 55.5. In the afternoon, the Fed’s Beige Book showed most areas of the economy are steadily improving, albeit at a slow rate.

Thurs-Fri: Print, Baby, Print 

A huge lesson over the past 5 years is don’t fight central banks. Stocks soared on Thursday after the European Central Bank (ECB) took historic steps to stimulate the world’s second largest economy and combat disinflation (reduction in the rate of inflation) and prevent deflation. In historic (and very aggressive) move, the ECB cut its deposit rate to negative -0.1%. The ECB also opened a 400-billion-euro ($542 billion) liquidity channel tied to bank lending and officials will start work on an asset-purchase plan.  Draghi (head of the ECB) said rates are at the lower bound “for all practical purposes” and signaled policy makers are willing to act again, if needed. Before Friday’s open, the Labor Department said US employers added 217k new jobs in May, more or less in line with estimates for 213K. The report also showed that the unemployment rate slid to 6.3%, which continues to follow the Fed’s outlook and beat estimates for 6.4%. 


Market Outlook: Don’t Fight The Tape

The market is acting VERY strong right now and weakness should be bought, not sold until the market gives us a reason to change our stance. Keep in mind that this bull market is aging (turned 5 in March 2014 and the last two major bull markets ended shortly after their 5th anniversary; 1994-March 2000 & Oct 2002-Oct 2007) but until we see signs of distribution (heavy selling) the market deserves the bullish benefit of the doubt. As always, keep your losses small and never argue with the tape.


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