The short-term battle between the bears and bulls has been decided, with the Fed juicing stocks and lifting the averages to a fresh 4-year high. For the week, the Dow Jones added 2.4%, the S&P 500 gained 2.1% while the Nasdaq was up 2.2%
A lot of people were calling for 2012 to be a year of heavy activity from the central banks, and that is turning out to be true. The latest turn comes from the Fed, lifting the averages to their best performance of the year on Wednesday after upgrading its view on the economy. Even though that’s not really pure monetary stimulation, it’s still another good example of the influence that the central banks have on the market.
Are earnings important? Ya. What about employment? Ya, that’s important too. But they both take a back seat to the central banks, where pure liquidity is the number one driver of asset prices. Particularly in what has been a deflationary environment over the last few years, where both companies and consumers paid off debt and cleaned up the balance sheet.
So call it a breakout for stocks, jumping to a new 4-year high as 2012 continues to be a great year for equities. But there seems to be too much complacency. Higher energy prices are going to be a drag on consumer spending, the Middle East remains volatile and Europe is still a total mess. Although a little more quietly right now as the story has cooled on Greece’s l attest bailout.
If some kind of fear or risk premium comes back into the market, with the VIX (volatility indicator) currently trading at a 5-year low, stocks could be in for a pullback going into spring. So if nothing else be prepared for volatility, because there doesn’t seem to be much risk priced into the market.
How about some updates?
Updates:
Apple, Inc. (AAPL) continues its upward ascent, barely nicking $600 for a new all-time high of $600.01. Keep in mind, this stock was trading between $385 and $400 before its Q3 results. It jumped to $450 on that good quarter, and it has basically been off to the races since. But in spite of the big gains, the valuation picture is still compelling, because Apple was one of the most undervalued stocks in the market before. For that you can thank the company’s prodigious earnings power, projected to make close to $50 a share this year. So anyone who bet or bet big on Apple is cleaning up right now.
Kansas City Southern (KSU) was also strong in the up market, gaining 8% on the week and hitting a new 52-week high at $74.98. Transports in general got a nice boost last week off the Fed’s upgraded view on the economy, and our mid-cap rail shipper was at the front end of the curve.
But in spite of stocks charging higher, gold was conspicuously weak, with Double Gold (DGP) falling 6% and Junior Gold Miners (GDXJ) dropping 5%. Actually, conspiracy theories aside, the official story is that a stronger economy weakens demand for safety assets like gold. So it looks like the market simply shifted some capital into stocks and away from precious metals.
Shifting back into some winners, Deere & Co. (DE) also saw a nice up tick, posting a 4% gain on the week. With a closing price of $83.22, the 52-week high just above $90 is less than 10% away.
And finally, some more awesomeness out of technology, one of the strongest sectors of the year, is Check Point Software Technologies (CHKP), adding 3.25% on the week to trade within 37 cents of the 52-week high at $63.26.
That’s all for this week, but until next time, here is an article talking about how gasoline prices are up 9 days in a row. I am definitely concerned about the impact higher gasoline prices will have on consumer spending. And in terms of cycles, gasoline prices usually rise in spring and summer as consumption increases. So to see prices on the rise this early and already very high, is an alarming trend. Anyway, enjoy.
Your Investment Partner,
Mike
