Stocks rallied for the second straight week but ended sharply lower for the month. January 2016 was one of the largest monthly declines in Wall Street's history. Stocks across the world plunged in the first half of the month on fear of a global recession. Then, on cue, a few powerful central banks jumped in and did their best to quell the violent selling. China jumped in twice in January 2016 with emergency measures and injected close to $80B to stimulate their market and their slowing economy. The European Central Bank (ECB) hinted at more easy money in March. Not to be out done, the Bank of Japan (BOJ) fired a bazooka and took rates into negative territory while continuing to print money! All that helped stocks bounce from deeply oversold levels. The near term low occurred on Jan 20, 2016 (a.k.a The Dalio Low) and as long as those lows hold- we expect the market to drift higher from here as they rally into their declining moving averages. Moreover, central banks love interfering with markets and have distorted the playing field for years. In the intermediate and long term, any near term rallies (or more easy money) aside, the market remains in lousy shape and we feel it is just a matter of time until the major indices fall 20% from their 2015 highs which officially defines a bear market. From our point of view, stocks topped out in 2015 and we are in the early innings of a new bear market (and a global recession). Several important areas of the market are already in a bear market (defined by a decline of 20% or more from a recent high) which means it is just a matter of time until the major indices play catch up to the downside. These are some of the important areas that are already in bear market territory: Commodities, The Small Cap Russell 2000 (IWM), Transports (IYT), Biotechs (IBB), Retail (XRT), Junk Bonds (JNK), Materials (XLB), just to name a few.
Monday-Wednesday's Action: Volatile Week Dow Moves Triple Digits Everyday This Week
Stocks fell on Monday as the market paused to digest last week's big oversold bounce. Oil prices fell again which dragged a slew of energy stocks lower. Oil plunged more than 5.5% which is not an insignificant sum. Economic data was thin on Monday. The Dallas Fed January manufacturing index fell to negative -10.2 vs 12.7 in December. The business activity index was minus 34.6 which missed estimates for -14 and last month's reading of -21.6 the previous month.
Stocks rallied sharply on Tuesday as the Fed started their two day meeting and the market continued to bounce from deeply oversold levels. Economic data was mixed. The FHFA house price index came in at 0.5% which matched the Street's estimate. The S&P Case-Sheller Index rose 0.9%, beating estimates for 0.7%. The PMI Services Flash index came in at 53.7, also matching estimates. The Consumer Confidence index rose to 98.1, beating estimates for 96.0. The Richmond Fed Manufacturing index came in at 2, which was lower than last month's reading of 6.
Stocks fell hard after the Fed concluded its 2-day meeting on Wednesday. The Fed held rates steady but left the door open for a possible rate hike in the future. The market was looking for a more dovish stance whereby the Fed would signal that they are not going to raise rates anytime soon. Steeping back it is important to note that we are in the early stages of a bear market and the defensive stance Gary has told you about for months is front and center.
Thursday-Friday's Action: Stocks Bounce on More Free Money
Stocks rallied on Thursday after investors made their way past Wednesday's Fed meeting and digested the latest round of earnings and economic data. Facebook (FB), PayPal (PYPL) and Under Armour (UA) were some stocks that rallied after reporting numbers on Thursday. Meanwhile, eBay (EBAY), Harmon (HAR), and Service Now (NOW) gapped down after reporting numbers. Economic data was mixed: Durable Goods fell -5.1%, missing estimates for a 0.2% gain. Jobless claims came in at 278k, beating estimates for 285k. Pending home sales rose to 106.8, just beating estimates for 106.7. The Kansas City Fed Manufacturing Index fell to -9 which shows is not healthy. Stocks rallied on Friday after the Bank of Japan surprised the Street and took rates into negative territory and continued their QE (money printing) program. This is an aggressive move to help stimulate their lackluster economy. In the U.S., GDP slowed considerably in Q4 2016, growing by only +0.7%, missing estimates for 0.9%. The weaker than expected GDP reading may help the Fed keep rates near zero for longer than initially expected. Remember, Wall Street loves easy money so we are back in the environment where bad news is good news.
Market Outlook: A Big Top
From where we sit, this aging bull market is over or on its last breath. The last two major bull markets ended shortly after their 5th anniversary; 1994-2000 & 2002-Oct 2007. The market is 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.
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