Friday, January 18, 2013
Stock Market Commentary:
Stocks are back in a confirmed uptrend and continue to rally after the fiscal cliff was averted and congress decided to put the best interest of the country ahead of their petty bickering. Stocks remain perched near resistance (2012 highs) and the action is very healthy. Looking forward, one should expect resistance (50 DMA line, downward trendline, neckline of the bullish inverse head and shoulders base, and 1448- December’s high) to now become support. The S&P 500 broke above its 2012 highs (1474) while the DJIA and Nasdaq are both below their 2012 high. The real strength remains in small and mid cap stocks evidenced by new all time highs in the Russell 2000 and S&P 400 indices. The uptrend that began on Friday, November 16, 2012- (after politicians hinted that a deal would get done for the fiscal cliff) remains intact and offers an interesting lesson for investors- stocks are closely paying attention to government officials (Recently, the Summer rally was sparked after Draghi said he will do whatever it takes to save the Euro). More recently the euro surged earlier this month after the ECB’s latest meeting and global equities are rallying after the Bank of Japan (BOJ) said they are going to flood the system with liquidity indefinitely So my primary theme is to pay very close attention to central banks and government action.
Monday-Wednesday’s Action: Stocks Digest Large Move
On Monday, stocks ended lower but near their intra-day highs as the market paused to digest its recent rally. Volume was below average which was healthy as it illustrates little interest from the institutional crowd. After Monday’s close, Federal Reserve Chairman Ben Bernanke told Congress to raise the debt ceiling and outgoing Treasury Secretary Timothy Geithner said the ceiling could be hit as soon as mid-February or Early March. The debt ceiling currently stands at a whopping $16.4 trillion.
Thursday & Friday’s Action: Stocks Are Strong
Before Thursday’s open, investors digested a slew of high profile earnings and economic data. The big news came from The Bank of Japan (the Japanese Central Bank) when they said they would print unlimited money which is bearish for the yen and bullish for equities. This reminds me of the old trading adage: Don’t Fight The Fed. It is important to note that nearly every major central bank in the world is flooding the globe with liquidity (US, ECB, BOJ, BOE, even Switzerland’s Central Bank) and this easy money stance has helped the riskon theme. Earnings data was mixed to slightly positive. Ebay (EBAY), United Health Group (UNH), Bank of America (BAC), Citigroup (C) were among some of the well-known stocks that released their numbers before the bell. On average, economic data topped estimates helped by an improving jobs and housing market. Initial jobless claims fell by 37k to a seasonally adjusted 335k which was the lowest level since January 2008 (or a 5-year low). Meanwhile, housing starts surged 12.1% in December which allowed 2012 to be the best year for housing since 2008 and reiterated our bullish call on housing stocks that we made in Q1 2012. The Philly Fed Index missed estimates but the market still jumped to fresh highs. Stocks were quiet on Friday as investors digested the latest round of mixed economic data. China said its economy matched estiamtes and grew by 7.9% and the preliminary reading from the University of Michigan Consumer Survey, which measures U.S. consumer sentiment, fell short of expectations.
Market Outlook: Uptrend
From our perspective, the market is back in an uptrend which bodes well for both the market and the economy, by extension. As always, it is extremely important to be flexible in your approach and change when the facts change (Thank you Mr. Keynes). For those of you that are new to our work, on October 9, we said “the rally was under pressure” and then said the “rally was over” on Oct 19. Immediately after that note was published, stocks fell sharply and a lot of technical damage occurred. Then we put out a note on Friday, November 16, 2012 (the exact low for this move) titled, “Time For A Bounce.” Stay tuned as we will continue to keep you one step ahead of the crowd. As always, keep your losses small and never argue with the tape.