Stocks Taking A Breath After A Big Run:
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. The bifurcated environment we have discussed at length in recent weeks remains in full effect- as large cap stocks (on average), continue to out perform their small-cap brethren. Keep in mind that the benchmark S&P 500 jumped nearly 10% from April’s low (1814) thru July’s high (1991) and in a normal environment – where Central Banks are not printing billions of dollars everyday- a 10% rally in an entire year would be considered decent. So clearly the market has earned the right to pause a little to catch its breath before the S&P 500 tries to cross above the psychologically important 2,000 level.
Monday-Friday’s Action: Earnings & Economic Data
Stocks fell on Monday as Geo-political fears continued to dominate the headlines. The prime minister of Malaysia reached a deal with the pro-Russian separatists that control the area where the plane crashed to retrieve the remains of the crash. In other news, John Kerry flew to Egypt to negotiate a deal between Israel and Hamas. The death toll in Gaza has reportedly climbed above 500 and seven Israeli soldiers died on Monday, following the deaths of 13 soldiers on Sunday. The fighting continued despite appeals for a ceasefire. President Obama spoke on Monday and said he will continue to monitor both situations but did not impose more sanctions on Russia or threaten to use force.
Stocks rallied on Tuesday as geo-political fears eased and investors focused on corporate earnings. Chipotle Mexican Grill (CMG) was one of the standout winners as the stock exploded higher (break-away gap) on monstrous volume. Economic data was relatively light as the consumer price index rose +0.3% in June which was softer than May’s reading of +0.4%. Core CPI, which strips out food and energy, rose +0.1%.
Stocks rallied on Wednesday as investors digested a slew of earnings data. After Tuesday’s close, Apple (AAPL) and Microsoft (MSFT) released their results. The big standout after Wednesday’s close was Facebook (FB). The social-media giant surged after reporting a monster quarter.
Thursday & Friday’s Action: Earnings Come Out In Droves
Before Thursday’s open, economic data was largely better than expected across the globe. PMI data rose in China and the Eurozone while US jobless claims tumbled to the lowest level in nearly a decade. China’s PMI jumped to the highest level since January 2013 which bodes well for the global economy. After the bell, US home sales tumbled at the fastest rate in nearly a year which put a little pressure on stocks. The Commerce Department said new home sales fell -8.1%, the largest decline since July 2013, to a seasonally adjusted annual rate of 406k units. A separate report showed US PMI slowed and came in at 56.3, down 1.0 point from June’s 57.3 final reading. Stocks fell hard on Friday after Amazon (AMZN) and Visa (V) both got clobbered after reporting their Q2 results. The Russian Central Bank raised the benchmark interest rate 50bps to 8.0% even as Russian GDP has been decelerating on a YoY basis since the end of 2011. In the US, durable goods rose by 0.7%, beating estimates for a smaller gain. The report showed that shipments of capital goods slid by -1.0% which is not ideal because that is used to calculate GDP.
MARKET OUTLOOK: Time For A Breather
The market is taking a breath after a strong rally. Keep in mind that this 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 distribution (heavy selling) the market deserves the bullish benefit of the doubt. As always, keep your losses small and never argue with the tape.