Stocks fell for a third consecutive week as the market pauses to consolidate the latest and very strong rally. As a quick refresher, the benchmark S&P 500 vaulted 7% from Feb’s low of 1980 to Feb’s high of 2119. Remember, in “normal” (non Easy Money) days, a 10% rally for the entire year was welcomed. So clearly 7% in under a month is a strong run and the market has earned the right to pullback and digest that move. That is exactly what is happening on Wall Street and so far the action remains healthy (for now). We would be remiss not to note that the market has not experienced a 10% correction since June 2012! That is a very long time and we are way overdue for a nice correction to shake out the weaker hands. We should also note that nearly every major central bank in the world continues to adopt a very strong easy money stance which should be bullish for stocks down the road. Further more, in very strong bull markets (present market included) weakness should be bought, not sold (i.e. buy the bounce after the dip). It is important (and healthy) to note that the small cap Russell 2000 index closed higher last week. The Russell 2000 tends to act as a leading indicator for the broader market -both up and down.
Mon-Wed’s Action: Another Shallow Pullback
Stocks edged higher on Monday as buyers showed up to defend the S&P 500’s 50 DMA line. The ECB officially began its version of QE. Reports suggested that the ECB was buying German and Italian bonds. Shares of Apple ($AAPL) jumped after the tech giant held its latest product launch and introduced the highly anticipated iWatch. The company also announced a partnership with HBO and a new Macbook notebook computer. The most expensive iWatch will cost $17k. But really, for Apple, what’s 17k among friends? In other news, General Motors (GM) announced a $5B share buy-back plan which helped the stock rally over 3%. M&A watchers saw a little action. Alcoa (AA) said it planed to acquire RTI International Metals (RTI) for $1.5 billion. Separately, shopping mall operator Simon Property Group (SPG) made a $16 billion bid to acquire Macerich Company (MAC).
Thurs & Fri’s Action: Stocks Edge Lower
Stocks soared on Thursday after the Fed released the latest round of bank stress tests and South Korea’s central bank unexpectedly cut rates. Citigroup (C), Goldman Sachs (GS), JP Morgan (JPM) and Morgan Stanley announced capital return programs via buy-backs and dividend increases. Bank of America (BAC) did not fare well. South Korea’s central bank jumped aboard the easy money train and announced a surprise cut in its seven-day repurchase rate, taking it down to 1.75%. Stocks fell on Friday as investors digested the latest round of economic and earnings data. U.S. producer prices slid by 0.5% in February which shows that deflation remains more of a threat than inflation. U.S. Consumer sentiment also fell which bodes poorly for the ongoing economy. Separately, Russia’s Central Bank cut rates to help stimulate their economy as the US dollar continued to soar and Crude oil (and a slew of other commodities) plunged.
Market Outlook: The Central Bank Put Is Alive And Well
Remember, in bull markets surprises happen to the upside. This has been our primary thesis since the end of 2012. We would be remiss not to note that this very strong bull market is aging (celebrating its 6th anniversary in March 2015) and the last two major bull markets ended shortly after their 5th anniversary; 1994-March 2000 & Oct 2002-Oct 2007). To be clear, the central bank put is very strong and until material damage occurs, the stock market deserves the longer-term bullish benefit of the doubt. As always, keep your losses small and never argue with the tape.