Stocks ended mixed last week as investors look forward to next week's Fed meeting (Tues/Wed) and the on-going drama with Greece. The latest round of incoming economic "data" failed to "impress" which means the Fed will likely not raise rates in the near future. It is important to note that the Fed has a dual mandate: help the economy and keep inflation near its 2% target. Right now, neither objective is being met which is why we do not think the Fed will raise rates until the "data" improves. We do not expect the Fed to do anything substantial next week - if anything, just change its rhetoric. The simple fact is that they remain "data-dependent" which means, by definition, no one in the world (including the Fed) knows when they will raise rates. Conversely, if the "data" weakens, we would not be surprised to see the Fed announce QE 4 (print more money). Interestingly, the small-cap Russell 2000 index led its peers and closed with decent gains last week. Looking forward, the bulls remain in control as long as the major indices remain perched below their 2015/record highs and we see any material selling/damage occur.
Monday-Wednesday's Action: Buyers Showed Up On Wed
Stocks slid on Monday as investors waited for Apple's (AAPL) latest developer conference. The tech giant announced a few new changes and items to their roster, namely Apple Music which allows people to stream their music. U.S. stocks edged lower after Friday's jobs report topped estimates which increased the odds of a Fed rate hike in the near future. The DAX, Germany's stock market, fell into correction territory defined by a decline of 10% or more from a recent high. Chinese imports and exports fell which is a drag on the global economy. China’s exports slid by -2.5% in May from a year earlier in dollar terms, while imports tanked by a whopping -17.6%, leaving a trade surplus of $59.49 billion. The report showed that the U.S. contributed +18.8% to total exports which is the most since August 2010. The DJIA turned negative for the year which is not ideal.
Stocks fell on Tuesday after weak economic data was announced from China. China said consumer inflation fell by 1.2% year on year in May which was below the Street's estimate and increases concerns that deflation is more of a threat than inflation as their economy softens. China said producer prices fell for the 38th consecutive month which is not ideal. Wholesale inventories rose by +0.4% in April, above expectations of a +0.2% rise. The National Federation of Independent Business said U.S. small business confidence rose to a five-month high in May of 98.3, the highest since December. The S&P 500 fell to its 150 DMA line.
Stocks surged on Wednesday helping the Dow Industrials, S&P 500, and the Nasdaq 100 all jump back above their respective 50 DMA lines as a slew of stocks bounced from oversold levels. The market rallied all morning and extended their gains after Bloomberg reported that Germany will offer Greek Prime Minister Alexis Tsipras aid in return for his commitment to one economic reform. A government spokesman told Reuters that Germany will only accept a deal between Athens and its creditors if all three major lending operations approved the deal. Latest headlines aside, the bulls showed up and bought the "dip." Weekly mortgage applications jumped 8.4% as buyers continue to do what they can to lock in low rates ahead of a potential rate hike later this year.
Stocks Quiet As Greek Drama Continues
Stocks were quiet on Thursday after the IMF put more pressure on the ongoing Greek drama. Retail sales rose +1.2%, beating estimates for a 1.1% gain. Ex-autos, retail sales rose 1%, beating estimates for a gain of 0.7%. Weekly jobless claims came in at 279k, slightly above expectations. April business inventories rose 0.4%, the largest gain in nearly a year. Retail inventories excluding autos, which go into the calculation of GDP, rose a solid +0.6% in April. Separately, the Atlanta Fed raised its GDP model forecast for real GDP growth in the second quarter to 1.9%, up from its earlier estimates of 1.1%. Separately, New Zealand's Central Bank surprised the world and cut rates to help stimulate their economy. In 2014, they began raising rates but were forced to cut them because their economy is not strong enough to stand on its own two feet. This serves as an important example for the U.S. Fed who is contemplating raising rates later this year. Stocks opened lower on Friday after the ongoing saga continued in Greece and U.S. producer prices topped estimates. The Producer Price Index rose +0.5% in May, topping estimates for a 0.4% gain. The gain was the largest since May 2012. Core prices, which excludes food and energy, rose 0.1%, beating estimates for a -0.2%.
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 (celebrated its 6th anniversary in March 2015) and the last two major bull markets ended shortly after their 5th 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. If you want exact entry and exit points in leading stocks, or access more of Adam's commentary/thoughts on the market. Consider joining SarhanCapital.com.
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