By: Michael Vodicka
“Even though corporate earnings have rebounded forcefully in the last three years, back to peak levels from 2007, the central banks of the world have been running the show.”
Stocks closed the week with a small gain as the averages continue to linger just below the 4-year high from late April. That bullish movement comes in the face of growing evidence that the global economy is slowing down, with both the private sector and countries around the world signaling slower growth in the second half of the year.
But that is causing a very peculiar dynamic in the market. Usually evidence of slower economic growth will hit assets like stocks and oil pretty hard. But in the era of uber central-bank intervention, the market has come to cheer evidence of slower growth because it increases the probability of monetary stimulation.
Even though corporate earnings have rebounded forcefully in the last three years, back to peak levels from 2007, the central banks of the world have been running the show. The market knows this very well, having been well trained for the last few years that central banks like the Fed, Bank of Japan, the Bank of England and China as well will be quick to respond to any material weakness in economic growth or seemingly even equity prices.
Long term, that’s not sustainable. Economic growth has to come from real economic gains, not currency devaluation. If currency devaluation was the path to prosperity, the Zimbabwe would be the richest nation in he world. But for the time being, it has placed what feels like a virtual put in the market, as investors and traders look to front run the central banks showering the market with trillions of dollars of liquidity.
As it stands, the S&P 500 is trading just below it’s 4-year high from late April. 2012 saw a big dip in May, but stocks were quick to rebound in June and July and have been holding at the high in August. Longer term, stocks have been on a very bullish trend for the last three years with only an occasional pullback. Take a look below at the daily chart of the S&P 500 for the last five years.
S&P 500 Daily Chart 2007-2012
Looking forward, with European leaders and Congress both on summer vacation, the market will turn away from politics and towards a string of economic data that includes:
- Tuesday: Producer Price Index, Retail Sales
- Wednesday: Consumer Price Index, Industrial Production
- Thursday: Housing Starts, Philly Fed
- Friday: Consumer Sentiment
This latest round of data will definitely give the market some info to sink its teeth into. Even if its bad, keep in mind, that increases the probability of central bank intervention, so for the time being the bulls have clear control of the market.
Updates:
Cimarex Energy (XEC) was the big winner of the week, adding a quick 13% as the market begins showing renewed interest in energy stocks. Energy stocks have been brutal for the last 18 months as the market worried about global economic growth and natural gas hit an all-time low below $2. But one of the things that has been interesting about the recent rally is that energy stocks have done well, and energy is very often a good indicator for risk appetite on the Street. After 18 months of getting beaten down, I am wondering if this could be a turning point for the energy trade. As it stands, Cimarex is now 34% above its low of $47 from late June when the market dipped. Take a look at the big rebound below.
Gold (GLD) has also been showing signs of strength after an unusually bearish run over the last 12 months. It looks like shares of GLD have put in a long-term bottom just below $150. Some of this fresh bullishness has a lot to do with the market expecting the central banks to once again get active as slower growth is predicted in the back half of the year. Gold has been up for 10 years ina row, but for 2012 is still showing a loss. I think we’ll see gold rally hard into the end of the year to keep the streak alive as the central banks wag the dog. Check out the medium-term bottom GLD just put in at $150. That’s a good level to keep your eye on.
And finally, we’ve got Apple, Inc. (AAPL), also beating the market with a 1.4% gain on the week. Shares of Apple have also been showing signs of strength, currently less than $23 away from the all-time high of $644. This stock has seen big gains in the last few years, but the earnings have always been there to support the cause. Looking forward, the company is set to release another version of the iPhone in a few weeks. Word on the Street is that it’s not a game changer at all, with modest innovations. It will be interesting to see if the Apple loyal will jump on board with the new iPhone, which is easily the company’s most important product accounting for more than 50% of annual revenue. For the time being the bulls are still in charge, but running into some resistance at the high, take a look at the all-time high below.
That’s all for this week, but until next time, here is an interesting article how Israel is preparing its citizens for a strike against Iran. If tat were to happen, look for crude to jump above $150 and stocks to crash. Enjoy!
Israel Plans Iran Strike, Citizens say Government Serious
Your Investment Partner,
Mike
Michael Vodicka is the president and founder of the Vodicka Group, Inc., a Registered Investment Advisor (RIA). He specialized in trading fixed-income derivatives at the Chicago Board of Trade before spending five years managing equity portfolios for a private investment research company.
Michael graduated from the University of Kansas with a degree in business communications and is registered with the State of Illinois and the SEC (Securities and Exchange Commission) as a Licensed Investment Advisor (Series 65).
