The bulls (or perhaps more accurately, the bull algos) put on quite a show again on Tuesday. For the fourth day in a row, stocks rocketed higher and the S&P 500 finished with the best one-day gain in more than a year. Not bad for a market that had been left for dead four days ago, right?
Remember, it was just four days ago that the sky was falling. The market was cratering. And there was fear in the air. Just four days ago, the S&P was down -7.4% from its high - and it took heroic measures (and some surprisingly kind words from Mr. Bullard) to keep the decline from reaching double digits. And just four days ago, a fair number of investors were ready to head for the hills and never invest in stocks again.
Four days ago, any long exposure felt like WAY too much exposure. Four days ago, investors were calling worrying about their portfolios, their strategies, and heck, even their financial futures. Four days ago angst was the watchword. And four days ago, it seemed that the bad old days had returned with a vengeance.
But now that the S&P has spiked up +6.6% from the intraday low seen on October 15 (and +4.2% on a closing basis), everyone is breathing a little easier. And everyone now sees that what the algos take away can also be handed right back - in short order.
However, the big rebound, which came directly on the heels of the big decline, left a fair number of folks scratching their heads.
Wasn't the market worried about the potential economic damage from the Ebola outbreak? Wasn't Europe supposed to drag the global economy back into a quagmire? Wasn't China a problem? Wasn't ISIS a concern? Wasn't the U.S. economic recovery at risk? Wasn't there a great deal of worry about deflation? And wasn't this list of worries the reason behind the market's month-long swoon?
Saying All the Right Stuff
While the corrective phase that began on September 19 may or may not be over, it is safe to say that the dire outlook that was firmly in place last week has clearly faded. But the question now on many investors' minds is why on earth did the market just turn on a dime?
First and foremost, James Bullard reminded the bears that the U.S. Federal Reserve was not out of bullets. In effect, what the St. Louis Fed President told a TV audience was that if the market didn't start behaving better soon, Ms. Yellen and her merry band of central bankers would take action. Bullard basically reminded traders that the Fed was not likely to stand idly by and watch a bunch of computerized trading algorithms ruin the economic recovery that has been so long in coming.
The mere threat of the Fed pulling back on the taper was enough to stop the stock rout in its tracks five days ago. You see, traders were reminded that the FOMC is now data dependent. Therefore, if the data is bad, the Fed could actually try to do something about it. And if traders have learned anything over the last five years it is that markets just LOVE it when the Fed refills the QE punchbowl!
But Wait, There's More...
While Mr. Bullard's reference to changing up the Fed's current game plan was enough to cause stocks to rebound more than 40 points last Wednesday, it took some additional well placed words for the bulls to rediscover their mojo.
There were word out of Japan that PM Abe might need to rethink the idea of implementing a tax that analysts have been worried about.
There was the announcement by the People's Bank of China that they were injecting a bunch of yuan into the banking system. Oh and the economic data released this week wasn't nearly as bad as had been expected.
There have been no announcements of new Ebola cases in the United States. This doesn't mean that the problem is solved, of course. But it also means that there is no burgeoning epidemic either.
There was also word that Apple (NASDAQ: AAPL) had hit the ball out of the park with its latest earnings report. And to lots of investors, as Apple goes, so goes the economy and the stock market.
And Then There is Super Mario and His "Bazooka"
Finally, there was word out of Europe Tuesday morning that the ECB was talking about buying corporate bonds, with some reports suggesting that this could start in early December. The thinking here is that the ECB could direct its bond buys at the heart of the problem - the banking industry. Therefore, the potential for the debt crisis to once again become a contagion and threaten the fabric of the Eurozone could - in theory anyway - be reduced dramatically.
Yes, it is true that the ECB has been long on talk and short on action. However, it is safe to say that the mere threat every once in a while of Mr. Draghi bringing out his "bazooka" has been a pretty effective tool in keeping things together across the pond.
Crisis Averted (Again)?
The end result has been an impressive move in the stock market. Suddenly the S&P500 is back above the seemingly all-important 200-day moving average. And just like that, the venerable index is also back above the August low. As such, the technical picture has been improving.
S&P 500 - Daily
View Larger Image
So, unless a new fear materializes, it appears that the recent decline was yet another in what has become a very long string of "healthy corrections" that tend to occur in a bull market. However, the bulls are most definitely not out of the woods just yet as the downtrend that began in mid-September remains intact.
Thus, it will be important for the bulls to keep up the pressure. For example, a breadth thrust would be a welcome sign right about now. And on the other hand, if the smallcaps begin to weaken again, it could become a problem. Therefore, it is probably best to remain on alert for a while longer here.
But the next time the market looks like it is about to come apart at the seams, it is important to remember that it just doesn't pay to "fight the Fed(s)."
Turning To This Morning
While the flood of earnings reports continues on Wall Street, the talk of the town remains the topic of the ECB buying corporate bonds. While several articles have discussed the benefits of such a scheme, ECB Governing Council Member Coene said today that there is "no concrete proposal" at this time to buy corporate bonds and that it is too early to tell if such a measure is needed. In Fedspeak, such a comment likely means the ECB has developed a plan but is not yet ready to unveil it. Recall that the ECB is quite good at "talking up" all kinds of plans but has been very light on implementation. In other news across the pond, a Spanish news report indicates that at least 11 banks (out of 130 total) from six countries have failed the latest ECB stress tests. Finally the talks between Russia and Ukraine on a deal to supply gas took a step backwards overnight. Here in the U.S. the NASDAQ will benefit from YHOO's earnings and U.S. futures are pointing to a flat-to-slightly higher open.
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
Hong Kong: +1.37%
Crude Oil Futures: +$0.10 to $82.59
Gold: -$3.60 at $1248.10
Dollar: higher against the yen, euro and pound.
10-Year Bond Yield: Currently trading at 2.193%
Stock Indices in U.S. (relative to fair value):
S&P 500: +0.37
Dow Jones Industrial Average: +6
NASDAQ Composite: +5.76
Thought For The Day:
Don't cry because it's over. Smile because it happened. -Dr. Seuss
Important Reminder: In order to keep pace with our growth, better serve our advisors and clients, and to provide scale for future growth, Heritage is teaming up with CONCERT Global - an SEC Registered Investment Advisor with more than $2 Billion in assets under management. CONCERT will provide more robust back-office, compliance, technology, and trading infrastructure. Client packets to make the transition will be arriving in the coming weeks.
Positions in securities mentioned: None
Wishing you green screens and all the best for a great day,
Investment Advisory Services Offered Through CONCERT Wealth Management, Inc. An SEC Registered Investment Advisor
The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program.
Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.
The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.
David D. Moenning, an advisor representative of CONCERT Wealth Management Inc. (CONCERT), is founder of Heritage Capital Advisors LLC, a legal business entity doing business as Heritage Capital Research (Heritage). Advisory services are offered through CONCERT Wealth Management, Inc., an SEC registered investment advisor. For a complete description of investment risks, fees and services review the CONCERT firm brochure (ADV Part 2) which is available from your Investment Representative or by contacting Heritage or CONCERT.
Mr. Moenning is also the owner of Heritage Capital Management (HCM) a state-registered investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Neither HCM, Heritage, or CONCERT is registered as a broker-dealer.
Employees and affiliates of Heritage and HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or Heritage/HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.
Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.