After just a brutal start to the year, the DOW and S&P reached an important level of support which finally brought in some buyers. More accurately, it was a level that stopped the sellers. Wednesday was an important session, as the DOW opened down big and saw a 550 point decline within the first couple of hours. An intraday reversal saw those losses cut in half. Thursday brought gains, followed by a stronger session Friday. The DOW inched out a weekly gain for the time in 2016. It’s a small victory, but one worth embracing.
The Wednesday reversal might not have been capitulation, but it certainly felt like it was in the neighborhood. It was comforting to see a continuation of strength to close out the week. It’s key to see if it can build off the positive momentum. Giving it up won’t be good. We believe this is likely an oversold bounce we’re getting, not a sustainable rally just yet.
What caused it? It was a number of things, but you never really know specifically. Crude oil was so washed out at in the mid $20’s, it’s reversal back above $30 is considered Bullish. The price of oil and the Stock Market are highly correlated right now. Corporate Earnings are coming in a little better than the already lowered expectations. Central Banks certainly played a role this week, reiterating their long-lasting support to their respective economies.
European Central bank President Mario Draghi warned Thursday that downside risks were increasing again and more stimulus might be necessary, causing a sharp move in equity and currency markets. “It will therefore be necessary to review and possibly reconsider our monetary policy stance at our next meeting in March,” Draghi told a news conference, making it clear that things had changed since December as oil prices fell sharply. Draghi was key in helping stem the the 2011 European debt crisis by stating the ECB will do “whatever it takes” to support the European economy. 5 years later, he’s sticking with it. Stocks caught a bid off this announcement.
China’s central banks initiated more cash injections in its money-market operations for the third week in a row, heading off a squeeze ahead of the country’s Lunar New Year holiday and increasing capital outflows. The People’s Bank of China added 400 Billion yuan ($60.8 Billion) to the financial system using reverse-repurchase agreements, the most in 3 years, bringing net injections via its various lending tools for the month to about 1 Trillion yuan. Those are really big numbers. The Chinese government is doing everything they can to stabilize the Chinese economy.
These central bank moves are having an impact on currencies. The Dollar is strengthening again, no surprise. That doesn’t help US exports. Corporate earnings reports are showing the negative impact the strong Dollar is having on US revenues and profits. That was expected, and it’s happening. Since things were so oversold, we find ourselves in an environment where less-bad news is considered good. It’s not a great place to be, but it’s much better than where we were a couple of weeks ago. We are prepared for the bumpy ride to continue, but we see things clearing up far out on the horizon.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
