Not much changed last week. The market remains exceptionally strong as nearly all pullbacks remain almost nonexistent. Over the last two weeks we saw the Bank of Japan & The European Central Bank step up and announce aggressive measures to stimulate their lackluster economies. The benchmark S&P 500 (SPX) continues trading near its record high and the market remains very strong. To be clear, the market is very extended right now and a light volume pullback into support (prior chart highs near 2019, then the 50 DMA line) would do wonders to help the market consolidate its very strong rally. Remember, the SPX was trading like a penny stock in October (which typically ends poorly). In the first two weeks of October, the SPX plunged -8% and then turned higher on Oct 15 and soared a whopping +11% in the last two weeks. That is a huge move (both up and down) and that type of volatility after a big move (bull market is now 5.5 years old) typically does not end well. Remember, in a non-QE world, a 10% annual gain was considered healthy. So 11% in only two weeks is abnormal and very impressive. Easy money from the Fed has played a major role in sending stocks higher since the historic March 2009 bottom. The SPX soared when QE has been in effect and fell -17% when QE 1 ended and fell -22% when QE 2 ended. The Fed ended QE 3 at the end of October but the market did not fall? The reason is because the QE trade has evolved, like famous investor Mohamed El-Erian so eloquently described it last week. The Fed may have ended QE 3 but they are still adopting an “easy money” stance. Additionally, other central banks around the globe, primarily European Central Bank (ECB) and the Bank of Japan (BOJ), recently began their version of QE. That’s how the QE trade has “evolved.” Instead of just the Fed printing gobs of money everyday we now have the ECB and the BOJ printing as well. So instead of the old Fed Put (the notion that the Fed will step in and save the day if Main St or Wall St weakened), it has now shifted to the Central Bank Put and this is a huge bullish fundamental backdrop for stocks.
Monday-Wed’s Action: Stocks Grind Higher…For Now
Stocks edged higher on Monday as sellers remained almost no where to be found. In China, Monday was their equivalent to our cyber Monday. Shares of Alibaba (BABA) (giant Chinese retailer) soared after the company said they sold over $1B in 17 minutes! For the day, the company said sales topped the $9B mark which is a staggering some by any normal measure. The word, WOW is an understatement. In other China-related news, Chinese stocks rallied after China’s securities regulator approved a new law which allows foreigners to invest directly in Chinese stocks. In Europe, a report from the ECB showed that it bought 2.6 billion (Euros) of covered bonds in the prior week in an attempt to stimulate markets.
Stocks were quiet on Tuesday as the market paused to digest the recent rally. Thomson Reuters reported that out of the 449 companies in the S&P 500 that have reported third-quarter results, 74.6% have posted earnings above estimates, while 59.3% beat revenue expectations. That data bodes well for the ongoing recovery. Stocks opened lower on Wednesday after the U.S. and China reached a deal to reduce carbon emissions to combat climate change. Once again, the bulls (a.k.a. the buy the dip crowd) showed up shortly after the open and sent stocks back to break-even on the day. Wholesale inventories rose +0.3% in September, beating expectations for a +0.2% gain.
Thurs & Fri’s Action: Stocks Trade Near Highs
Stocks were quiet on Thursday as investors sat back and watched energy prices continue to implode. Crude oil plunged -2.5% and slid below $75 a barrel while RBOB Gasoline futures continued leading the way lower, plunging another 3.7%, hitting the lowest level since 2010! Shares of Wal-Mart (WMT) broke out of a big multi-year base after the company reported a larger-than-expected profit and said comparable sales at U.S. stores rose for the first quarter in seven. In other news, it was encouraging to see shares of Lennar Corp. (LEN) also break out of a very big base (earlier in the week) which also bodes well for the ongoing economic recovery. The Labor Department said initial jobless claims rose by 12k to 290k, topping estimates for 280k. On a more positive note, the total number was below 300k for the ninth consecutive week. Before Friday’s open, U.S. retail sales topped estimates and rose by 0.3% in October, which beat the 0.2% forecast. This echoes the bullish action we saw in a slew of retailers, led higher by the big base breakout in WMT on Thursday.
Market Outlook: The Central Bank Put Is Alive And Well
Remember, in bull markets surprises happen to the upside. We have also noted that the bull market is aging and may be in the process of forming a large topping pattern but that topping pattern was negated as stocks repaired a ton of technical damage in the latter half of October. Keep in mind that the 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). As always, keep your losses small and never argue with the tape.