Easy Money Reigns Supreme…For Now
Once again, easy money, from the Fed and other central banks, continues to send stocks higher and distort the playing field. Every major central bank in the world is back in easy money mode (including the U.S. Fed). The easy money trade has been the primary driver of this very long bull market since the March 2009 bottom. The dynamic has been simple: stocks fall, central banks print. We thought the madness would stop but it looks like we were wrong. Last week, we saw the Fed adopt an easy money stance by lowering their estimate for future rate hikes. That sent the US dollar tumbling and a slew of beaten down areas of the market soaring. The move also sent a clear message to markets that the easy money stance is alive and well. What concerns us is that global markets are trading all over the map. Typically, wide and loose swings are not healthy for an aging bull market. It now appears that markets will continue to react well to the easy money trade and all the areas that benefit from a lower dollar are trying to bottom. These are the same areas that were getting annihilated over the past 18-24 months. If this is indeed the bottom for these areas than that changes the dynamic. We do know that this bull market can not go on forever but at the same time we are here to interact with what is actually happening, not why something is happening. Right now, we know there is virtually NO SELLING on Wall Street and, for now, this steady grind higher is what we have seen several times over the past few years when market participants throw caution at the wind and relentlessly buy on the easy money trade. Some of these areas are: Emerging markets ($EEM), Gold ($GLD), Oil ($XLE $OIH), Steel ($X), Transports ($IYT), Materials ($XLB, Junk Bonds ($JNK), just to name a few. What we do know is that in the short term the market is very extended and this bull market is aging by any normal measure. The fact that it refuses to fall illustrates, for now, that the easy money trade still matters. Also keep in mind that bear market rallies tend to last between 4-10 weeks, we just finished our 5th week.
Monday-Wednesday’s Action: Stocks Grind Higher
Stocks edged higher on Monday as investors digest the recent/strong rally we have seen since Feb 11. Overnight, China said industrial output was the weakest since 2009, but the Shanghai index still rallied close to 2%. The rally in Chinese stocks came after the new head securities regulator made it clear that he will keep boosting their equity market.
Stocks were relatively quiet on Tuesday after the Bank of Japan did nothing at their latest meeting but did say they are ready to add more stimulus if needed. In the U.S., the producer price index fell -0.2%, matching estimates for -0.2%. Meanwhile, retail sales slid by -0.1%, also matching estimates. The Empire State Manufacturing report rose by 0.62, beating the Street’s estimates for -11.25. The Redbook, which measures weekly same store sales, rose 0.6%, lower than last week’s reading of 0.7%. The housing market index, which measures demand for new homes, came in at 58, missing estimates for 59. Business inventories came in at 0.1%, higher than the Street’s estimate for unchanged.
Investors digested a lot of data on Wednesday. Before the open, the consumer price index (CPI) fell -0.2%, slightly better than the Street’s estimate for a decline of -0.3%. Core prices, which exclude food and energy, rose by 0.3%, higher than the Street’s estimate for 0.2%. Year-over-year consumer prices rose by 2.23%, which is above the Fed’s target of 2%. Housing starts and permits were mixed, starts rose 5.2% to a 1.178 million annualized rate while permits, fell -3.1% (est unchanged) to 1.167 million. Industrial production fell -0.5%, missing estimates for -0.2%. At 2pm, the Fed decided to leave rates steady and adapted a somewhat dovish tone with respect to future rate hikes.
Thursday-Friday’s Action: Easy Money Here To Stay
The Dow Jones Industrial Average and S&P 500 turned positive for the year as investors digested a slew of economic data. Weekly jobless claims came in at 265k, beating estimates for 270k. The Philly Fed Survey came in at 12.4, beating estimates for -1.4. The Current Account came in at -125.3B, missing the consensus for -115.0B. Leading indicators came in at +0.1%, missing estimates for +0.2%.The financials and biotechs continued to lag while the beaten down areas of the market continued to soar. The Transports ($IYT), Materials ($XLB), Gold ($GLD/$GDX), Silver ($SLV), Steel ($XLS), Emerging Markets ($EEM) all rallied sharply and hit fresh multi- month highs. Financials joined the bullish party of Friday which helped the major indices.
Market Outlook: Rally Continues On Wall Street
The market was deeply oversold so keep in mind the strongest rallies in history occur during bear markets (a.k.a bull traps). As always, keep your losses small and never argue with the tape. If you want help with the market, contact Adam or – Join FindLeadingStocks.com.