Week In Review: Tale of Two Tapes Continues

SPX - QE Review

MARKET UPDATE: Stocks End Week Near 2014 Highs-  – 5.2.14

In the short term, the market is acting much better as the S&P 500 and DJIA continue to flirt with fresh record highs. Meanwhile, the Nasdaq, Small/Mid Cap stocks continue to lag their peers as biotechs, high-beta, and growth stocks remain under pressure. As previously mentioned, the Nasdaq and Russell are forming Head & Shoulders topping patterns but these patterns need to be confirmed (neckline breaks) before a top is confirmed. Until then, this is nothing more than a sloppy base to consolidate 2013’s very strong rally. Also keep in mind, even with the latest pullback, the major averages have not seen a 10% correction in years (we are way overdue). The fact that we have not pulled back 10% illustrates how strong the market has been since 2012. The primary factor of this very strong bull market remains easy money from global central banks (see chart).

MON-WED: STOCKS EDGE HIGHER

Stocks closed higher on Monday, shrugging off earlier weakness as the bulls showed up and defended the SPX’s 50 dma (on a closing basis) and M&A news dominated the headlines. M&A activity helped lift stocks and help boost confidence. Drug manufacturing giant Pfizer (PFE) gapped higher after confirming its interest in AstraZeneca (AZN). Separately, Forest Laboratories (FRX) agreed to acquire Furiex Pharmaceuticals (FURX) for $1.1 billion. In other news, a slew of momentum stocks ended lower and continued to lag their larger cap peers. The market rallied on Tuesday as the DJIA & SPX continued to outperform the Nasdaq and Russell 2000. Interestingly, many beaten down momentum stocks turned higher from deeply oversold levels which suggests a near term low is in place (providing Tuesday’s low holds). After Tuesday’s close, TWTR and EBAY both fell after announcing earnings. Stocks edged higher on Wednesday as investors digested a slew of earnings and economic data. Before Wednesday’s open, GDP rose by 0.1% in Q1 which missed estimates for a gain of 1.2%. ADP, the country’s largest private payrolls company, said US jobs rose by 228k, easily beating the 210k estimate. In the afternoon, the Fed ended its two-day meeting and tapered QE by another $10B. The vote to reduce QE from $55bn to $45bn per month was unanimous. The Fed said the economy slowed in Q1 because of the polar vortex. Their focus remains firmly on the outlook for labor and inflation, both of which remain below par as the Fed continues to taper QE.

THURS & FRI’S ACTION: Jobs Data Tops Estimates

Stocks were relatively quiet on Thursday as investors waited for Friday’s jobs report to be released. Before Friday’s open, the Labor Department said US employers created 288k new jobs in April and the unemployment rate slid to 6.3%. Both numbers easily beat forecasts (210k and 6.6%).  Keep in mind that the primary factor for this entire bull market has been easy money from global central banks. Friday’s stronger than expected economic data helps the Fed end QE, not increase it.        

MARKET OUTLOOK: AGING BULL

Stepping back the market is building a new base up here as investors digest last year’s strong rally. Remember, the bull market turned 5 in March 2014 and the last bull market topped out after its 5th birthday (Oct 2002-Oct 2007). Clearly, this bull is aging which means the easy money from this cycle is probably behind us and it will get a lot trickier as we move forward. As always, keep your losses small and never argue with the tape.

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