By: Michael Vodicka
“So as it stands, the big question is whether this is a suckers rally or a sustainable move higher?”
After a brutal May and tough start to June, stocks finally showed some signs of life, posting their best day and week of the year on news the ECB was moving to support Spain. For the week, the Dow Jones added 3.6%, the S&P 500 gained 3.7% while the NASDAQ led after tacking on 4%.
The big rally came on word the ECB (European Central Bank) was moving to support Spain. At this point, the details are still fuzzy. No one knows what the total cost will be, the rates, the terms of any agreements or the implications of larger Euro countries progressively getting in line for more help. None of those questions have been answered, but that doesn’t really matter.
As long as that gusher of money stays open all is well with the world. For the time being it was enough to appease the market’s thirst for liquidity, but longer term, monetary stimulation and super cheap lending rates just aren’t sustainable.
Looking forward, we’ve got a decent amount of economic data hitting the wire this week.
- Wednesday-Producer Price Index (PPI) and Retail Sales
- Thursday-Consumer Price Index and Jobless Claims
- Friday-Industrial Production and Consumer Sentiment
Beyond actual data, the Euro zone will be even more important than usual this week as details of the latest rescue package emerge. If the market all the sudden doesn’t like the terms or implications of another bailout, sentiment could change on a dime.
We’ve also got a huge Greek election this week, where the citizens of Greece must choose a pro or anti-bailout government. That could be another big source of volatility that ties in with Spain. Word on the Street is that Spain isn’t being asked to make big spending cuts like Greece was, so Greece is now pissed about the deal it got. So that throws another monkey wrench into the picture.
So as it stands, the big question is whether this is a suckers rally or a sustainable move higher? From the high of 2012 to the recent low, the averages fell about 10%. That’s a pretty healthy pullback that could provide an attractive entry point for investors with cash on the sidelines.
After this week, we saw about 4% of that 10% dip wash away, so the risk-reward has contracted a bit. Corporate earnings are still awesome and valuations on individual stocks and the market look pretty solid right here. But that’s not really the problem with anything. It’s uncertainty out of Europe and how that effects liquidity. And the bearish trend on that front is well in play.
Updates:
Intercontinental Exchange, Inc. (ICE) was at the top of the charts with a 7.45% gain on the week. The bullish movement was driven by record trading volumes in May for its Brent crude contract, a reflection of the general volatility in the energy markets. Bigger picture, shares have been hanging out just below the all-time high above $142 for most of the last year without being able to move higher. Regulatory issues are hounding the exchanges right now, so if we see some clarity on that front, that should give the group a pop.
The Spanish bailout is viewed as being good for growth, which means transports were on the rise. That included our mid cap rail shipper Kansas City Southern (KSU), adding an outsized 6.4% on the week.
And finally, with technology leading the market, Check Point Software Technologies (CHKP) was up 6.3%, Apple, Inc. (AAPL) gained 3.5% and PowerShares QQQ’s (QQQ) added 4.07%.
That’s all for this week, but until next time, here is some more insight on what to expect this week. Enjoy!
Europe’s Impact on US and Week Ahead
Your Investment Partner,
Mike
