July 2015 was a volatile month, as investors had to navigate two potential external shocks (Greece and China) and digest the latest round of economic and earnings data. After all was said and done, stocks ended the week and month higher after successfully testing critical support (bottom of the year-long trading range and the 200 DMA line) twice in July. Stepping back, the major indices are still in the middle of their year-long trading range with the Nasdaq leading and the Dow Industrials lagging. By definition, until either support (floor) or resistance (ceiling) is taken out we have to expect this sideways action to continue. For the benchmark S&P 500, support resides near 2039 and resistance near 2134. In the short term, the market is moving sideways while the intermediate and long term trend remains up. We are still in a very strong (but aging) bull market, which, by definition, means the path of least resistance remains higher (until any material technical damage emerges). The big takeaway from earnings season so far is that investors do not "like" social media stocks (Facebook, Inc (FB) , Twitter, Inc. (TWTR) , LinkedIn Corp. (LNKD) , Yelp, Inc. $YELP)) and have an "appetite" for restaurant stocks (Cheesecake Factory Corporation (CAKE) , Panera Bread Co. (PNRA) , Chipotle Mexican Grill, Inc. (CMG) , Buffalo Wild Wings (BWLD) , etc).
Monday-Wednesday's Action: Bulls Defend 200 DMA
Stocks fell hard on Monday, dragged lower by a huge -8.5% decline in China's Shanghai composite. A lot of technical damage occurred on Monday as the Dow Jones Industrial Average and the small-cap Russell 2000 index both sliced below their July 7, 2015 near term low which bodes poorly for the other averages. The benchmark S&P 500 closed just above its longer term 200 DMA line which is not ideal. The Nasdaq composite sliced below its 50 DMA line. In more M&A news, Teva Pharmaceutical (TEVA) said it will buy Allergan's (AGN) generic pharmaceuticals business for $40.5 billion. Separately, US regulators slapped Fiat Chrysler Automobiles ($FCAU) with a record $105 million for lapses in safety recalls. This came one week after hackers said they can control Chrysler's Jeep Cherokee. Economic data was light with durable goods rose 3.4%, beating 3.1% estimate. The Dallas Fed Manufacturing survey fell to -4.6%, versus a negative -7.0 in June.
Stocks rallied on Tuesday after the bulls showed up and defended the 200 DMA line in the benchmark S&P 500 index. A slew of earnings and economic data was released. The PMI Services Flash index rose to 55.2, beating estimates for 54.8. The Richmond Fed Manufacturing index came in at 13, beating estimates for 7.5. On the downside: the Case-Shiller index fell -0.2%, missing estimates for +0.3% and consumer confidence slid to 90.9, missing the Street's estimate for 99.6. That bodes poorly for the economy, because nearly 2/3 of the economy is comprised of consumer spending. After Tuesday's close, Twitter and Yelp gapped down after reporting their latest quarterly results. Meanwhile, Panera Bread and Buffalo Wild Wings both gapped up after releasing their numbers.
Stocks rallied on Wednesday after the Fed concluded its two day meeting and held rates near zero. The Fed did not mention any changes to future rate hikes and remains "data-dependent." Pending Homes sales fell sharply to -1.8%, missing estimates for a gain of 1%. A slew of earnings were announced, and the big takeaway from earnings season (so far) is that social media stocks are getting sold (TWTR, FB, LNKD, and YELP), while restaurant stocks are being bought (PNRA, CMG, BWLD, CAKE, etc).
Thursday-Friday’s Action: Earnings Continue Coming Out In Droves
Stocks were quiet on Thursday, as investors digested a slew of earnings and economic data. Before the open, the government said US GDP grew by +2.3% in Q2 2015, missing estimates for +2.6%. This directly contradicts the Fed's narrative (that the economy will improve in the second half of the year and that will justify a rate hike). The problem the Fed faces is that the economy didn't improve, even with rates at zero! Earnings roulette continued with a handful of stocks gapped up after reporting earnings, and a handful gapped down. Procter & Gamble Co. (PG) , American Express Company (AXP) , Exxon Mobil Corp. (XOM) , United Technologies Corporation ($UTX), Caterpillar (CAT) and IBM (IBM) were a few Dow stocks that gapped down after reporting earnings. On the upside, The Walt Disney Company, (DIS) , Mastercard (MA) , Nike (NKE) , and Visa (V) are all up after numbers. Earnings data continued to be mixed. Weekly initial claims rose to +267k, beating estimates for a gain of 272k. Friday was the last trading day of the month, and stocks ended up after the bulls defended support (200 DMA line twice in July). The employment cost index rose +0.2% in the second quarter, which missed expectations and was the lowest level in the 33-year history of the report. The reading surprised the Street and basically eliminated the chance for the Fed to raise rates in September. Anything is possible with the Fed, but so far, the 'data" continues to disappoint. The Chicago PMI rose to 54.7, beating estimates for 50. Consumer sentiment softened to 93.1, missing estimates for 94.1.
Market Outlook: The Central Bank Put Is Alive And Well
Remember, in bull markets, surprises happen to the upside. This has been our primary thesis since the end of 2012. We would be remiss not to note that this very strong bull market is aging (it celebrated its sixth anniversary in March 2015) and the last two major bull markets ended shortly after their fifth anniversary (1994-2000 & 2002-Oct 2007). To be clear, the central bank put is very strong, and until material damage occurs, the stock market deserves the longer-term bullish benefit of the doubt. As always, keep your losses small and never argue with the tape.
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