The Stock Market Continues to Climb on the Fed's Stimulus Promise!
The Past Week: The Dow and the S&P 500 highest closing level in nearly five years while the Nasdaq marched to new 12-year highs!
by Ian Harvey
September 15, 2012
The effect on markets of the European Central Bank's plan to buy government bonds of struggling euro zone countries, then the Fed's opened-ended commitment to spur growth have been breathtaking. The Dow and the S&P 500 reached the highest closing level in nearly five years while the Nasdaq marched to new 12-year highs.
The Federal Reserve’s new round of Quantitative Easing (QE) and promise to keep policy easy, well into the future propelled stocks and other risk assets higher, putting the Dow less than five percent away from its all-time high in the past week.
The stock market ended higher for the fourth-straight session Friday, logging sharp gains for the second week, as Wall Street cheered the Federal Reserve’s decision to embark on another round of monetary stimulus.
The stock market briefly cut their gains on Friday, after ratings agency firm Egan-Jones lowered the sovereign debt rating of the United States to AA-minus from AA, but soon bounced back.
And while history indicates that September is the worst month of the year, all three major averages are so far up nearly 4 percent across the board, as was discussed would be likely in the article “A Surprise September Rally”.
The stock market has racked up double-digit gains since June, despite prognosticators’ expectations that the market was heading for a summer sell-off.
• The Dow Jones Industrial Average (DJI) gained 2.2 percent this past week, to 13,593, its highest close since Dec. 10, 2007.
The Dow has gained 12 percent since hitting its 2012 low June 4.
Bank of America (BAC) led the Dow gainers for the week, while Intel (INTC) sagged.
• The Standard & Poor's 500 Index (SPX) this past week jumped 1.9 percent to 1465, its best close since Dec. 31, 2007.
The S&P 500 is up 16.6% for the year.
Among the key S&P sectors, energy was the best weekly performer, while utilities dragged.
• The Nasdaq Composite Index (COMP) gained 1.5 percent to 3183, its best close since March, 2000.
For the year, the Nasdaq is up 22.2%.
Even if the stock market pulled back from early highs, it has become quite vulnerable to a pullback, and that should surprise no one. The stock market has risen sharply since June. The Dow is up 12% since June 4, with the S&P 500 up 14.6% and the Nasdaq up 15.9%.
Plus, all three indexes look overbought. Their relative strength indexes are all above 70; a reading that high suggests a security or index is overbought.
The CBOE Market Volatility Index (VIX), widely considered the best gauge of fear in the stock market, added 0.5 point, or 3.3%, on Friday, regaining just enough ground to close back atop the 14.50 level.
TOP OPTIONS TRADES SINCE JULY 01, 2012
|DLTR Aug 110 Calls||32%||UIS Oct 17 Calls||79%|
|HSY Aug 70 Calls||56%||TSO Nov 25 Calls||54%|
|NKE Oct 92.50 Calls||49%||HLF July 47.50 Calls (again)||38%|
|FB Aug 25.00 Puts||500%||DISH Sept 30.00 Calls||100%|
|APPL Jan 13 650.00 Calls||71%||CSTR Oct 42.50 Puts||400%|
|LNKD Aug 92.50 Puts||30%||LNKD Aug 100.00 Calls||250%|
|SLV Nov 30.00 Calls||114%||JCP Nov 25.00 Calls||67%|
|GLD Nov 165.00 Calls||72%||LVS Dec 45.00 Calls||67%|
Flows into equities were strong, as they were reported to be over $12 billion in the week ending last Wednesday.
This could be due in part to the decline in the bond market, as the Asset Performance chart shows that the performance of iShares Barclays 20+ Yr Treas.Bond (ETF) (TLT) has turned negative for the first time this year. In contrast, crude oil has moved back above the zero line for the first time since May.
If even a small fraction of the money that has moved into bonds over the past few years moves back into the stock market, prices could explode on the upside.
The November crude-oil contract made new rally highs in the past week, up $2.70 a barrel. The next likely target is in the $100 area, with major resistance waiting in the $108 to $110 area. Oil stocks are acting well, and this sector of the stock market may provide some good buying opportunities in the week ahead.
Crude oil in New York was up 58 cents to $98.89 a barrel after reaching as high as $100.42. Crude hasn't closed above $100 since May 3. ”Brent Crude”, the North Sea benchmark oil, was up 78 cents to $116.66 a barrel.
The national average retail price of gasoline was $3.871, according to according to AAA's Daily Fuel Gauge report, up from Thursday's $3.869 and up 16% this quarter.
It was a powerful week for the metals. The December Comex gold futures surged $35.90 on Thursday in reaction to the Fed’s announcement.
Gold as measured by the SPDR Gold Trust (GLD) moved above that of TLT on August 16, when GLD closed at $155.63. On Friday, it closed at $171.86.
The buying strategy for the next few weeks will be to have some orders in place at good support where the risk can be well-controlled.
Gold settled up 60 cents on Friday, to $1,772.70 an ounce, and was up 1.9% for the week.
Silver gained 2.9% on the week.
Copper rose 5.1% for the week -- and was a direct beneficiary of the Fed decision.
Treasury yields zipped higher in the past week as investors debated the outcome of the Fed’s plan to buy $40 billion in mortgages a month. Yields climbed in part because the Fed is shifting its focus to mortgages, but also as the dollar fell and risk assets rallied. The 10-year was yielding 1.869 percent late Friday, its highest level since May 10.
It is expected that the 10-year yield will move to 2 percent, but investors will continue to buy dips and yields should not rise significantly unless the economy improves.
Expect the bond market to be very focused on the economic reports, such as existing home sales and housing starts Wednesday and the Philadelphia Fed survey and jobless claims Thursday, since the market will be attempting to second guess the Fed’s take on the economy.
Company News and Earnings in the Past Week
• UnitedHealth Will Join The Dow UnitedHealth Group (UNH) will replace Kraft Foods (KFT) in the Dow Jones Industrial Average after the close on Sept. 21, S&P Dow Jones Indexes announced this morning. Kraft is spinning off its North American grocery business.
The change is the Dow's first since June 2009 when General Motors (GM) and Citigroup (C) were replaced by Cisco Systems (CSCO) and Travelers Companies (TRV).
UnitedHealth jumped as high as $55.27 but fell back to $54.25, up 36 cents. Kraft was off 20 cents to $39.93.
There had been speculation that Apple (AAPL) might go into the Dow, but that would have required a huge stock split, possibly as big as 10-for-1. That's because the Dow is price-weighted. That means the higher the stock price, the more influence a stock has on the index.
IBM, the priciest Dow stock, was up 45 cents to $206.81.
Economic News for the Stock Market in the Past Week
The ‘Organization for Economic Co-operation and Development (OECD)’ also reported on Friday that companies have cut back on international investment due to the economic uncertainty.
In the US, the economic data was mixed, as producer prices were up the most in three years, due in part to crude oil prices. The chart shows what appears to be an upside breakout,
suggesting that this may be a trend that will continue. The Royal Bank of Canada’s report on consumer sentiment hit a new high for the year, and their jobs outlook was the best it has been since President Obama has been in office.
Respondents also commented that they were benefiting from the Fed’s policy. This should be a positive for consumer sentiment and the retail sector.
The ’Organization for Economic Co-operation and Development (OECD)’ is a multidisciplinary international body made up of 30 member democratic countries that support free market economies.
They offer a structure/forum for governments to consult and co-operate with each other in order to develop and refine economic and social policy. While the OECD does not set rules and regulations to settle disputes like other international bodies, it encourages the negotiation of agreements and the promotion of legal codes in certain sectors. Its work can lead to binding and non-binding agreements between the member countries to act in a formal way. The OECD is best known for its publications and statistics.
The OECD has been called a think tank, a monitoring agency, a rich man's club and an unacademic university – callit what you want -- but the OECD has a lot of power. Over the years, it has dealt with a range of issues, including raising the standard of living in member countries, contributing to the expansion of world trade and promoting economic stability.
European shares closed sharply higher following the Fed news, but investors continued to track developments in Greece and Spain after the 'European Central Bank - ECB' and ’International Monetary Fund – IMF’ denied that they were in negotiations with Spain for a 300 billion euro bailout.
The NYSE Composite in the Past Week
Last week’s action in the stock market has improved the intermediate-term outlook, suggesting that we can be well above last week’s highs before the end of the year.
The longer-term analysis of the NYSE Composite A/D line, is one of the positive factors. Some of the other advance/decline (A/D) line had been lagging the price action, but they clearly improved last week.
On a short-term basis, the stock market is due for a rest. One or maybe two sharp down days could relieve the overbought status.
Sentiment for the Stock Market in the Past Week
The sentiment of the newsletter writers is still too bullish, but they could be getting fully invested, and may be less of a factor over the near term. According to the AAII survey of individual investors, taken after the Fed action, only 36% of individual investors are bullish, which is well below bullish extremes.
The Major ETFs in the Past Week
The financial stock market finished the week with solid gains, as the 'European Central Bank - ECB' and Fed’s action was better than the stock market expected. This had been a primary concern of many and had kept them out of stocks.
The major Exchange-Traded Funds (ETFs) have all managed to do well in the past week. The Spyder Trust (SPY) closed up 1.9%, while the SPDR Diamond Trust (DIA) gained 2.1%. Even more impressive was the Russell 2000, as the iShares Russell 2000 Index (IWM) was up 2.6%.
Technology stocks had been leading the charge for the past month, but last week the Nasdaq-100-tracking PowerShares QQQ Trust (QQQ) as was up only 1%.
1. The Economy and Earnings in the Week Ahead – September 17, 2012
2. The Week Ahead in the Stock Market – September 17, 2012
3. The Major ETFs in the Week Ahead – September 17, 2012