Stocks opened the week higher but stalled mid-week and closed mixed to lower after sellers showed up in the latter half of the week. Several important areas of the market, that had been leading for months, are now in “pullback mode” as we enter the heart of earnings season. Some of the recent leading areas such as: Defensive stocks, Consumer Staples, Food, Beverage and Utility stocks began pulling back last week after a healthy rally. We are also watching Gold and Gold stocks (another leading area) which stalled on Wednesday and are now pulling back to digest their latest rally. Transports (IYT), Financials (XLF), and a slew of energy stocks remain strong (XLE, XOP, OIH) which continues to bode well for the market. That is the positive sector rotation we are continuing to see beneath the surface. Since earnings season began, the big winners have been financials, a few transportation and commodity stocks. Meanwhile, the big loser has been big tech (GOOG, NFLX, ILMN, V, SBUX, MSFT, just to name a few). Technically, the market is pausing just below record highs which is perfectly normal after a big move. Next week we have another Fed meeting (yippee) and several hundred earnings reports. We want to analyze the health of this pullback to see if it is healthy or the beginning of something worse. Since Feb’s low, the S&P 500 has defended its short term 21 day moving average (just below 2070) almost perfectly. That is the first level of support we are watching. If that level breaks, then watch for the 50 and 200 DMA lines near 2012-2015.
Monday-Wednesday’s Action: Stocks Edge Higher As Crude Hits Fresh 2016 High
Stocks rallied on Monday, led by a huge positive reversal in crude oil, after oil producers decided not to freeze production on Sunday. A slew of energy stocks surged on the news. Earnings news was mixed. Morgan Stanley ($MS) fell after reporting a lousy quarter. Elsewhere, Hasbro (HAS) enjoyed a huge breakaway gap after the company reported numbers. The toy maker enjoyed a healthy quarter largely due to strong sales from Disney’s toys ($DIS). Disney also rallied nicely and jumped to a three month high after being upgraded.
On Tuesday, the market opened higher but sold off shortly after the open as a lot of money piled into commodity stocks as the US dollar fell. Crude oil broke out of its latest base and hit a fresh multi-month high. Silver soared over 4% and also vaulted to a fresh multi-month high. Netflix (NFLX), Illumina (ILMN) and International Business Machines Corp (IBM) all gapped down after reporting earnings. Goldman Sachs (GS) rallied even though they reported a big drop in earnings. Economic data failed to impress. Housing starts fell -8.8% to 1.089M, missing estimates for 1.167M.
Stocks rallied on Wednesday after crude oil broke out and hit a fresh high for 2016. This helped a slew of commodity stocks rally which lifted the broader indices. Earnings data was mixed. Shares of Yahoo (YHOO) and United Healthy (UNH) rallied after reporting numbers but others fell. Economic was relatively light. Existing home sales beat estimates in March, rising +5.1% to a 5.330 million annualized rate. Existing home sales fell -7.3% in February and the year-on-year rate was only +1.5% which is still weak. Gold, and a slew of gold stocks, reversed and closed lower which could be a sign of near term fatigue.
Thursday-Friday’s Action: Earnings Roulette Continues
Stocks fell on Thursday after the European Central Bank (ECB) held their latest meeting and several stronger than expected economic data was released in the U.S. The U.S. dollar rallied hard which put pressure on a slew of commodities and commodity stocks. Stocks were relatively quiet on Friday as investors digested the latest round of earnings data and the Bank of Japan (BOJ) hinted at more easy money. Shares of Alphabet Inc. (GOOG and GOOGL), Visa (V), Microsoft (MSFT), and Starbucks (SBUX) were some of the big cap stocks to fall after reporting earnings. Meanwhile, shares of Norfolk Southern Corp (NSC), Core Laboratories (CLB). and BJ’s Restaurant’s Inc (BJRI) were some of the stocks to rally after reporting earnings.
Market Outlook: Easy Money Back In Play
Stocks are pulling back as the S&P 500 flirts with its short term 10 day moving average. Economic and earnings data remains less than stellar but all that matters now- is easy money from global central banks. As always, keep your losses small and never argue with the tape.