Stocks rallied last week after the Fed held rates near zero and created the "perfect hedge" by remaining "data-dependent." Yellen told us that she is ready to raise rates if the "data" improves, but is also ready not to raise rates (and implied that QE4 is not off the table) if the "data" weakens. This is exactly what we have been saying in this column over the past few months because the data remains too weak. At this point, we do not expect the Fed to raise rates until the "data" markedly improves, which means the easy money trade remains alive and well. The bulls were happy to see the Nasdaq composite, Biotechs, and small-cap Russell 2000 index all break out and hit fresh record highs last week. The Nasdaq composite finally surpassed its 2,000 high.
Monday-Wednesday's Action: Buyers Bought The Dip
Stocks fell on Monday after Greece failed to reach a deal over the weekend. We would be remiss not to note that European stock markets fell but the euro rallied on Monday. The European Central Bank President Mario Draghi allayed concerns when he said the ECB would continue approving emergency funding for Greek banks - providing they have enough cash and collateral to operate. He added "the ball lies squarely in the camp of the Greek government to take the necessary steps." The Empire manufacturing index fell 3.09 in May to a negative -1.98 in June, hitting the lowest level since January 2013. Industrial production unexpectedly fell -0.2% in May and missed estimates for a gain of 0.2%. The National Association of Home Builders (NAHB) housing market index rose to 59, beating estimates for 56. It was the highest reading since last September as buyers rush to lock in low mortgage rates.
Stocks rallied nicely on Tuesday as Greece remained in the headlines and the Fed began its two day meeting. May housing starts fell by -11.1% to 1.036M, missing expectations for 1.090M. Meanwhile, building permits rose +11.8% month-over-month. Stocks rallied on Wednesday after the Fed held rates steady and downgraded GDP growth to under 2% for 2015. Janet Yellen held a press conference and outlined the FOMC's thoughts. On average, she remains cautiously optimistic and remains "data-dependent." So in essence, Yellen came out with the perfect hedge. She said, the FOCM stands ready to raise rates if the data improves and will continue to "monitor the developments carefully" - which means they are ready to keep rates at zero or print more money if the data doesn't improve. Yellen also said to focus on a path of rate hikes, not the first one. Separately, the ongoing back-and-fourth continued with Greece. The weekly MBA Mortgage Index fell to negative -5.5% to follow last week's +8.4% increase.
Thursday-Friday’s Action: Stocks Rallied After Fed Keeps Rates At Zero
Stocks soared on Thursday as investors breathed a sigh of relief that the Fed remained dovish. The Biotech ETF ($IBB) broke out to a fresh high and the Nasdaq composite and small-cap Russell 2000 index also broke out and hit new highs. The consumer price index rose 0.4%, missing estimates for a 0.5% gain. Even though it missed estimates it was the largest jump since Feb 2013. Core prices which exclude food and energy rose 0.1%, missing estimates for 0.2%. The current account deficit for Q1 2015 totaled $113.30 billion which was just below the Street's estimate for $116.70 billion. Leading Indicators ticked up 0.7%, beating estimates for a +0.4% gain. The Philadelphia Fed rose to 15.2 from 6.7 which beat the Street's estimate for 8.0. Stocks fell on Friday after the ECB extended a lifeline to Greece.
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 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. 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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