The major averages paused last week to consolidate their recent (and robust) gains. From its summer low of 1266 the benchmark S&P 500 index has jumped a nearly 15%! After such a strong move, it is normal, and healthy, to see the market pullback, or move sideways, to consolidate that move. At this point, we would like to continue giving the market the bullish benefit of the doubt and shall err on the bullish side as long as the major averages remain above their respective 50 DMA lines. However, if the selling intensifies one should quickly adjust their portfolio accordingly. The underlying notion that has helped stocks rally has been that global central banks will step up and do everything they can to avoid the global economy and the eurozone from imploding.
MONDAY-WEDNESDAY’S ACTION- Stocks Continue Too Consolidate Recent Move
Stocks fell on Monday as new fears surfaced regarding the European bailout plan and weaker than expected data was released from China. The big news occurred after German Chancellor Angela Merkel rejected French President Francois Hollande’s latest appeal to activate oversight of the banking union “the earlier, the better.” Furthermore, investors are concerned that deadlock over regulation may delay a critical comportment for resolving the Euro’s debt crisis. In China, a survey showed that manufacturers and retailers are less optimistic about sales than they were at the end of the second quarter. It is also interesting to note that the S&P 500 has fallen nearly every Monday during the third quarter.
Stocks opened higher on Tuesday but ended lower as fear spread that the global economy will slow. Thousands of protesters gathered in Spain to express their discontent over the new round of austerity measures for the 2013 budget. In the US, Charles Plosser, the head of the Philadelphia Fed, said that QE 3 will not do much boost economic growth or lower employment. In other news, the S&P Case Shiller index said home prices edged higher for a sixth-consecutive month which bodes well for the ongoing housing recovery. Elsewhere, consumer confidence bounced back and hit the highest level in seven months in September.
Stocks and a slew of other risk-on markets fell on Wednesday after European shares fell as protesters spread from Spain to Greece. The euro slid to a two-week low after yields on Spanish and Italian debt rose. Economic news was a nonevent. The Commerce Department said new home sales totaled 373k which fell short of the Street’s estimate for 380k. However, the reading was just shy of two year highs. Home prices rose compared to the same period last year which is a net positive for the ongoing housing recovery. The Mortgage Bankers Association said weekly mortgage applications rose last week as interest rates fell to record lows.
THURSDAY & FRIDAY’S ACTION: Stocks Fall On Fresh EU Woes
Stocks enjoyed healthy gains on Thursday despite a series of weaker than expected economic data points. Before Thursday’s open, the government said Q2 GDP grew at 1.3% which fell from the prior reading of 1.7%. A separate report said that durable goods orders showed notable weakness as new orders plunged by -13.2% in August. Interestingly, if you exclude transportation, durable goods orders fell by -1.6%. The Labor Department said weekly jobless claims fell to 359k which missed the Street’s estimate for 379k. In Europe, stocks Spain announced its 2013 budget which included spending cuts and no tax hikes.
Stocks fell on Friday after news spread that France will raise taxes and investors were concerned that Spanish banks would not do well on with their latest stress tests. The Chicago PMI report fell to 49.7 which missed estimates and fell below the boom/bust level of 50. Elsewhere, consumer sentiment fell to 78.3 from 79.2. Consumer spending matched estimates and rose in August by the largest amount in six months. Personal income rose by +0.1% but after adjusting for inflation and taxes income fell by 0.3%. For the quarter, the Dow Jones Industrial Average ended up nearly 4% and the S&P and Nasdaq rose more than 5%.
MARKET OUTLOOK- CONFIRMED RALLY:
From our point of view, the market is in a confirmed rally which means the path of least resistance remains higher. The major averages have spent the past two weeks pulling back to consolidate their recent gains. It is encouraging to see all the major averages trade near their 2012 highs, especially considering how much weaker other capital markets around the world are. Technically, the next level of support are April’s highs (1422 in the S&P 500) and then the 50 DMA line. As always, keep your losses small and never argue with the tape.