Market Finally Takes A Breather:
We wrote last week that, “In the short term, the market looks a little tired up here and has earned the right to pause for a while to catch its breath.” That is exactly what has happened as the major averages fell last week after a slew of “important” data was released. Longstanding readers of our work know that we pay more attention to how markets react to the news, than the news itself. Let’s just say the reaction was not ideal and that defense is king at until further notice. It is also important to note that the benchmark S&P 500 index negatively reversed last month from a new all-time high (1991) after a big move. A negative reversal occurs when a market opens higher and closes lower for a given period and typically a near term “rest” (at the very least) may be in store for stocks.
Monday-Friday’s Action: Stocks Wait For Data
Stocks opened lower but closed higher on Monday as investors braced for a busy week of earnings and economic data and digested the latest round of M&A news. Carl Icahn had a good day on Monday after news spread that Family Dollar (FDO ) agreed to be acquired by Dollar Tree (DLTR) for $74.50/share, representing a 22.8% premium to Friday’s closing price. Elsewhere, Zillow (Z) confirmed that it will acquire its competitor Trulia (TRLA) for $3.50 billion in stock, which represents a 25.3% premium to Friday’s close.
On Tuesday, stocks negatively reversed (opened higher but closed lower) as geo-political woes flared up. The European Union imposed new sanctions on Russia which put pressure on Equity markets across the globe. Economic data was mixed- The Case-Shiller 20-city Home Price Index for May rose 9.3%, missing estimates for a gain of +10%. Elsewhere, the conference board said consumer confidence jumped to the highest level since Oct 2007. The index jumped to 90.9 in July, easily beating estimates for a gain of 85.6. Stocks were relatively flat on Wednesday after the Fed remained dovish and the initial read on Q2 GDP showed the US economy grew by 4% last quarter, beating estimates for a gain of 3.2%.
Thursday & Friday’s Action: Stocks Pounded And Break Support
Stocks were hammered on Thursday, suffering their largest single day decline since February 2014. Argentina defaulted on its debt for the third or fourth time (who’s counting at this point) since 2001. It’s never fun to see any entity (let alone a country) default on its debt. Eurozone CPI rose by 0.4% year-over-year which was less than the 0.5% forecast. This is important because the European Central Bank (ECB) is vehemently fighting deflation and wants inflation to pick up. So any data which does not help the inflation thesis bodes poorly for the market. In the US, jobless claims rose to 302k, missing estimates for a gain of 310k. Briefing reported that manufacturing activity in the Chicago region softened significantly in July as the Chicago PMI fell to 52.6 from 62.6 in June. Stocks fell hard on Thursday which illustrates how fragile sentiment is -even after this five year bull market and was dragged lower by small-cap stocks. Before Friday’s open, the Labor Department US employers added +209k new jobs, missed estimates for a gain of 230k. On a positive note, July was the sixth straight month above 200k which was the longest stretch of jobs growth since 1997.
MARKET OUTLOOK: Time For A Breather
We have been writing for weeks that the market was over due for a nice pullback. Well, that long-awaited pullback is finally upon us. Going forward, it is important to analyze the health of the pullback. Keep in mind that the 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 sustained distribution (heavy selling) the market deserves the bullish benefit of the doubt. Furthermore, the S&P 500 has not experienced a 10% correction since 20011! which is longer than most historical comparisons. As always, keep your losses small and never argue with the tape.
The Small-Cap Russell 2000: Large Double Top Continues To Form
The S&P 500: Monthly Chart