Stocks ended lower for the first full week of the new quarter and before earnings season begins in earnest. The short term action remains sloppy (to put it nicely) and continues to frustrate both the bulls and the bears. Eventually, clean trends will emerge, but for now, patience is paramount. The intermediate term action remains sideways and the long term trend remains up. Stepping back, the big theme this year has been the unraveling of the strong dollar trade that has prevailed since mid-2014. This year, the Fed has been very vocal about their dovish stance (a.k.a easy money/weak dollar) and that has caused a lot of capital to flow into areas that have fallen due to a stronger dollar over the past 18-24 months. In the short term, the major indices had a very big rally from the Feb 11th low and are now digesting that move ahead of earnings season. Underneath the surface, we are seeing a lot of sector rotation taking place which is healthy in the near term. The big winners this year remain Gold and Silver, Utilities, Food, Defense Stocks and the other beaten down areas over the past 18-24 months. The big losers continue to be the areas that were working for most of 2015 (FANG stocks, biotechs, healthcare etc). Big money continues to move into Gold and Silver stocks as the metals try to bottom after a brutal 5 year bear market. Other beaten down areas which put in a near term low on January 20th are also pausing to consolidate their recent gains. These areas benefit from a weaker dollar: Steel ($SLX), Transportation ($IYT), Materials ($XLB), Energy Stocks ($XOP, $XLE, $OIH), Emerging Markets ($EEM), just to name a few. For obvious reasons, we will be watching the aforementioned areas closer as a “tell” for the market. Oil soared 63% in 5 weeks, then pulled back -17% before bouncing last week off its 50 DMA line. Since the Feb low, the S&P 500 soared +14.48% and is now pulling back to consolidate that strong run. Even with all this noise, the S&P 500 is still moving sideways and just made its 5th lower high since last summer’s all-time high. We now enter earnings season which is the next big catalyst for investors. If sellers show up and this turns out to be a huge bear market rally we will be ready. Most bear market rallies last between 4-10 weeks and we just finished week 8 (something to keep in the back of our mind). We know easy money from central banks has greatly distorted the playing field so we are prepared for any outcome. Without easy money, we would say with near certainty that the market is forming a large top and is heading lower.
Monday-Wednesday’s Action: Stocks Drift Lower
Stocks fell on Monday as markets paused to digest the very strong rally we have seen over the past 8 weeks. Commodities dragged stocks lower even though the US dollar also fell. Factory orders fell -1.7%, missing consensus for -1.6%. Alaska Air ($ALK) said it plans to acquire Virgin America (VA) in a deal valued at $4 billion. Groupon (GRPN) rallied after the company said Comcast will invest $250 million. Comcast will work with Groupon on potential strategic partnership opportunities. In Europe, unemployment fell to 10.3% in February which was the lowest level since 2011. The IMF said a Greek deal is far off which weighed on investor confidence. Stocks fell on Tuesday as global selling continued across multiple asset classes. India’s Central Bank joined the easy money party and lowered its key interest rate to 6.5%, from 6.75%. Meanwhile, Australia’s Central Bank held rates steady. In the U.S. the PMI Service index rose to 51.3, higher than the prior reading of 49.7 and just above the boom/bust level of 50. The ISM service index came in at 54.5, beating estimates for 54. Overseas stock markets fell after sluggish economic data from Japan and Europe.
Stocks rallied on Wednesday, helped by a big rally in a slew of Biotech (IBB) and Healthcare (XLV) stocks. Transportation stocks lagged for most of the day as they pause to digest the recent rally. The Fed released the minutes of their latest meeting and the minutes reiterated the view that Fed officials are in no rush to raise rates. In other news, oil prices vaulted over 5% after a surprise drop in in U.S. crude supply.
Thursday-Friday’s Action: Stocks Continued To Be Sold
Stocks fell on Thursday as sellers finally showed up. The selling began in Asia and Europe and continued in the U.S. Japan’s stock market continued to fall as the Yen soared. European stock markets were mostly lower even though the European Central Bank (ECB) hinted at even more easy money! President Mario Draghi wrote in the bank’s annual report today that they won’t “surrender” to excessively low price growth. Then, the ECB’s Chief Economist Peter Praet, spoke at a conference in Frankfurt and made it clear that further stimulus would be provided, if needed. Big financials dragged U.S. markets lower as many big banks broke below their respective 50 DMA lines. After Thursday’s close, Janet Yellen, Ben Bernanke, Alan Greenspan, and Paul Volker (current and former heads of the Federal Reserve) spoke at a conference and reiterated the Fed’s easy money stance. Oil prices also soared over 6% which set the stage for a positive gap up on Wall Street. Stocks opened higher but closed near the lows for the day which is a sign of fatigue.
Market Outlook: Easy Money Back In Play
Stocks are still range-bound for the past 10 months. Patience is key until a bigger trend emerges. As always, keep your losses small and never argue with the tape. If you want help with the market consider joining: FindLeadingStocks.com.