Dow Hits 13,000: Is The Cat Out Of The Bag?

With many people expecting a pullback – the market jumps a wall of worry.

Finally, there is more recognition that the economy is getting better based on stock market trends.  We made the prediction a few weeks ago that the Dow Jones would reach 13,000 because investors were seeing a turnaround in the U.S. economy (See January 23, 2012.) This forecast was fought by several people who argued the economy was still in shambles and well-known economists stating a recession was on the way.  The stock market has rallied because economic fundamentals have improved and earnings are in much better shape than a few quarters ago.  Stocks are still at relatively low P/E ratios at about 12/13 percent on average and are a better bargain than bonds which are yielding almost zero returns.

Is The Cat Out Of The Bag?

Is the rally almost over? No. Some analysts were quick to point out that Dow 13,000 doesn’t mean anything.  They are wrong again. These are the same people who didn’t predict Dow 13,000 and lack reasonable explanations as to why investors are clamoring for stocks.  The Dow passing a round number is headline worthy and will get more people interested in how their 401K is doing.  Couple this with further information via data points about the economy improving and this could be the second leg of the upward momentum – not the last wave.  Some investors sold out of the market early and won’t make most of the returns they could have if they don’t find new entry points while others were too concerned with U.S. tax policy and PIIGS to see the positive momentum.  They are also fighting the Fed that has made it clear interest rates will be low for some time to come and this strategy tends not to payoff in the medium/long run.  We are re-calibrating and looking for new resistance and support levels but we will wait for new economic data to come in.  The cat isn’t out of the bag when many people still don’t believe in the current rally even though momentum is getting stronger.  This view could change quickly if pressures from the Middle East increase oil prices and decrease real disposable income. which would negatively impact U.S. demand and consumer spending if payroll gains don’t rise further.

Oil Rises Over 2 Percent After Iran Stops Exports To England and France – Greek Debt Deal Reached:

Oil prices reacted sharply after Iran declared it would no longer sell oil to England and France.  Other new reports from major media outlets noted Iran could halt oil exports to Greece.  March Brent crude was up comfortably above $120 which could be a new support level if rangebound trading occurs, but trading volatility may return to U.S. markets.  European and early Asian markets didn’t move as much as oil did on yesterday’s news with China making an announcement about reserve requirements. Today, the EU announced some terms of the Greek bailout which included $130 billion dollars which may give traders reasons to get behind equities during the short trading week.  This could be offset by more news from the Middle East but the underlying market trend in U.S. equities recently has been upward.

European finance ministers agreed on a second bailout package for Greece to keep the country from defaulting next month which caused the euro to rise against the dollar. The Greek debt deal involves haircuts that are forcing some investors to accept much less for bonds in exchange to keep Greece solvent.  The bailout doesn’t fix longer term structural issues facing Greece such as entitlements but the money guarantees some relief that lowers the possibility it would be forced out of the European common currency.  Euro-dollar levels and volatility will be important for the week with less economic data that will be released.  The NASDAQ was down Friday (although the Dow and S&P were up which will make the Russell 2000 an interesting index to monitor for new weekly trends. The NASDAQ is beating the Dow so far in 2012 rising 13 percent year to date.

Iran Stops Sales Of Oil To England And France – World Markets React

Iran has declared it will not sell oil to England and France today.  This new revelation sent markets and media buzzing with rumors that oil prices might rise in the U.S.  Iran is reacting to a fresh new set of sanctions passed by the European Union over its nuclear program.  Saudi Arabia has openly stated they would supply extra oil to take strains off of demand if Iran, the fifth largest producer of crude oil, took away some supply.  The new move by Iran to withhold oil from world markets comes on the heels of a U.S. holiday for President’s Day and the American markets will be closed.

World markets have begun to react the news with positive and negative speculation about how the oil supply shock from Iran may impact markets.  According to some reports, major oil producers from England and France have reduced their exposure to supply side risks from Iran but the decrease supply caused oil prices to rise today for Brent crude.  Asian markets rose early like the Nikkei rising above 1 percent and news was announced that China was lowering reserve requirements.

The NASDAQ Is Outperforming the Dow So Far This Year  (February 18, 2012):

Technology is back in style with Wall Street. The NASDAQ has getting more attention from investors and outperforming the Dow so far this year. The NASDAQ has risen roughly 13 percent since the beginning of the year trumping the Dow Jones Industrial Average’s 6 percent gain over the same period. Technology is a hot sector again with Apple reaching $500 per share and hype over new issues coming to market such as Facebook. We are monitoring our prediction from earlier this year that forecasted a good run for tech and so far – it’s been pretty good.

Technology and riskier assets such as small capitalized stocks will be important for the rally to continue that started last year. Technology stocks didn’t just start outperforming the DJIA recently and going back six months a dollar invested in the NASDAQ would have brought higher returns than if that same dollar was invested in the Dow. A 3 month chart shows the tech heavy index broke out away from the Dow since mid January 2012 although it was down yesterday.  If sector rotation is occurring it will involve more investors trading shares from safer, defensive stock plays opting for riskier companies that are still growing.  This would be evidence to us that the market could rise further and that overall sentiment about the economic future in the medium-run is shifting more positively.

Dow Close In On 13,000 February 2012: Is 15,000 Really Possible This Year?

Anything is possible.

The Dow Jones proved naysayers wrong once again by moving closer to 13,000 after a few days of up and down activity characterized by higher volatility.  The Dow Jones rose to its highest level in 3 and a half years closing at 12,949 with the benchmark Standard and Poor’s 500 comfortably above the 1,350 resistance level at 1,361. The news on the economics data front has been more positive than mixed positive causing some analysts to increase their expected U.S. GDP levels for the year while some economists are still in the doldrums expecting a recession.  We believe the chances of a recession in the U.S. economy are less than 1 in 10 and don’t foresee this happening unless an external shock occurs that is unpredicted such as the Japanese earthquake and Tsunami of 2011 that kept the economy from rebounding sooner.  We do not believe uncertainty from fiscal or monetary issues would stop the upward momentum at the current time.

The rebound in the jobs market has been solidified with new economic data this week related to jobless claims and the economy benefitted from a stronger housing market.  Greece played a big part in trading sentiment early in the week but the impact from headlines across the pond had less of an effect when unemployment data showed continued strength which increased calls for the jobless rate to get below pre Lehman-Bears crisis levels before the November 2012 elections.  While economists calling for a recession have taken to the hills with little or no explanatory power, we predicted improved performance in equities which has occurred.  We are strongly considering taking our economic forecasts from mixed-positive to positive.

Barron’s may have moved early this week with predictions of Dow 15,000 but there is some reason to believe that with heightened uncertainty and bad calls from economists who are no longer sharp at gauging trends based on electronics or the internet, the wall of worry could lower with equities moving up.  Siegel could be on to something.

Stock Market Hits 2012 Year Highs On February 11 Jobless Claims and January Housing Data:

Unemployment benefits claims fell for the week ending February 11, 2012. Initial jobless claims fell 13,ooo to 348,000 which is more evidence that the labor market is improving.  New claims for jobless benefits fell to the lowest level since March 2008 when Bear Stearns declared bankruptcy.   The decrease in employment benefits claims was better than most economists were expecting falling by 3.6 percent from the prior week according to the Labor Department. The four-week moving average of initial jobless claims, a less volatile measure of job market strength fell to 365,250 continuing the trend that has been established since the fourth quarter of 2011.

Housing Market Data Positive for January 2012

The Commerce Department reported today that data from the housing market improved year over year.  New home construction was up by 10,000 units in January 2012 compared to December 2011 at an annual pace of 699,000 units.  This is higher than averages for the last 3 months at 615,000 units and up almost 10 percent from a year ago. 

The positive data announced today from the Labor Department and the Commerce Department helped lift stocks up to the highest level in 2012 so far.  The Dow Jones closed above 12,900 with the S&P 500 closing above the sticky level of 1,350, up 1.1 percent today ending the trading session at 1,358.  The headline risk from the Greek crisis was muted today by the overwhelming positive news about the U.S. economy.  We continue to see evidence that the current stock market rally is in tact.

Euro Stress Syndrome (Part 2) February 2012:

Think the problems in Europe don’t matter for the U.S. stock market? Wrong. The euro zone stress syndrome is back in full effect due to the increased political economy issues in the region led by Greece again this week.  The stock market is moving again based on news coming in from Europe which helped volatility rise in the last few days just as it did in October 2011.  What is Europe stress syndrome or euro zone stress disorder? It the proclivity for traders to change their minds quickly in the short-run based on increased headline risk coming from Europe. Euro stress syndrome is the increase in trading volatility based on news from Europe. It always exists to some degree but levels are heightened right now.

Long term, economic fundamentals impact stock prices as well as individual company earnings but traders make moves daily based on news.  Trading volatility and the amount of news headlines coming in from sites, social media and television related to Greece specifically has increased this week as we expected but this doesn’t mean traders have changed their long term view of the region.  GDP from the euro zone came in higher than expected yesterday but stocks fell as Greek bailout news may have dominated sentiment. Germany’s GDP fell by 0.2 percent while France’s GDP rose 0.2. percent. Greece will unravel slowly and increased U.S. economic activity will buttress negative sentiment that is currently building- the questions that are most important right now are:

• How much will the U.S economy grow?
• How much will European weakness impact the U.S. economy?
• How long?

VIX Jumps After Greek Austerity Measures Pass – Stocks Hold Firm:

Volatility rose today one full trading day after Greek austerity measures were passed in Europe.  We expected increased trading volatility this week and the .VIX jumped past 20 today rising over 8-1/2 percent.  The S&P passed 1350 which is a critical level according to some technicians but it could not hold above there during early trading.  The Greek austerity measures have passed but questions remain about the viability of implementation with protests from Greek civilians.

News from Europe is having an effect on the markets short-term with traders losing conviction about holding stocks long term.  While the .VIX jumped above 20 today, it is still very far from the 3 month high of about 35 and has been trending downward.  An increase in volatility over the next few days could signal an opportunity for buying stocks.  The Dow Jones retreated back to Friday’s losses and but made a sharp comeback in the final minutes of trading back above 12,855 with the S&P closing back in on 1,350.  There is still no clear evidence the rally is over yet.

U.S. Markets React Favorably To New Greek Austerity Measures February 2012 Passing:

Europe and Asia trade up after Greek austerity measures voted in.

The U.S. stock market is digesting the news about the  passage of new Greek austerity measures in a positive way. The Dow Jones moved up sharply today almost erasing the losses that occurred on Friday when the U.S. major averages had the worst day in 2012.  Riots and protests in Greece didn’t stop the country’s Parliament from passing austerity measures that may increase the short term pain for Greek citizens.  The country currently has 21 percent unemployment and youth joblessness is around 48 percent.

At 3:30 EST, the Dow was up 81 points to 12,882 and followed the lead of Asian markets as well as European stocks that rose today.  The euro zone still faces tough decisions ahead to deal with structural issues that cause debt to heap in the region. Although the long term structural issues facing Greece and the euro zone as a whole have not been alleviated, global markets welcomed the passage of the austerity measures.

Greek Austerity Measures February 2012 Pass Amid Violence-Asian Markets React:

Greek lawmakers have passed new austerity measures amid rioting and violence in the country.  The new austerity measures were needed for Greece to obtain new funding from the IMF and creditors offering bailout funds.  Around the country, reports of looting and riots hit media headlines as Greek citizens reacted to the vote from Parliament that will slash the number of government jobs as well as cut the minimum wage by 20 percent.

Greece will now be able to obtain new bailout funding from European creditors and the International Monetary Fund.  Without this funding, the country was sure to default on its debt and would have been forced to leave the euro zone.  Greece will receive euro130 billion ($170 billion) in new bailout funding and although the Greek citizens were unhappy about the austerity vote results, the markets are welcoming some resolution to the country’s debt crisis.

How Will U.S. Markets React To The Passage Of The Greek Austerity Measures?

Very few traders are placing huge bets on Greece right now compared to a few years ago before the crisis began.  Exposure to the Greek debt crisis has been reduced by most large U.S. institutions and it is doubtful that a further unraveling will occur in U.S. markets due to the Greek crisis alone.  Greece isn’t the only country in need of bailout funding and we expect more news from other euro zone nations to make headlines in the short-run.  The Greece austerity measures may have solved the immediate need for funding but structural problems exist in the country and region that haven’t been fully addressed in terms of spending and entitlements which could bring the crisis to a new phase in the future.  Volatility will be important to watch this week as well as the euro/dollar trade.

Asian Markets traded up at 11:30 EST with the Nikkei at 9012.95 up 65.78, the Hang Send Index up 144.70 to 202928.56 and China’s Shanghai Composite Index up 3.21 to 2,355.