Weekly: Stocks gain on promise of stimulus from China and the ECB

Friday, November 21, 2014 -

Stocks rocketed out of the gates on the open, gapping up more than 1% to start the day as both China and the ECB promised heavy new stimulus measures – and then prices steadily sold off all day long to finish near unchanged for small and tech stocks and only moderately in the black for larger cap stocks.

It was a real weird day for stocks to end this week. The futures markets were sky high before the cash markets opened based on heavy stimulus rumors out of China and the ECB. And while stocks moved sharply higher at the start of trading, buying interest waned not long after the open. The major indexes steadily pulled back well off their highs for the session with larger cap issues holding on to about half their gains while smaller cap and tech issues lost the majority of the early gains.

The gains for large cap stocks lifted the Dow and the S&P 500 to new but nominal closing highs. The Dow climbed 91 points (+0.5%) to 17,810, the Nasdaq edged up 11 points (+0.2%) to 4,713 and the S&P 500 advanced 11 points (+0.5%) to 2,064. The NYSE finished at +0.8% and the small cap Russell 2000 at +0.14%. Microcaps, the highest risk stocks, finished at -0.1%.

For the week, the Nasdaq rose by 0.5 percent, while the Dow and the S&P 500 jumped by 1 percent and 1.2 percent, respectively. The small caps fell 0.1% while the high risk microcaps fell almost 1% this week.

Evidence that the global financial community loves free printed money stimulus decisions could be seen in overseas trading. Japan’s Nikkei 225 Index and Hong Kong’s Hang Seng Index rose by 0.3 percent and 0.4 percent, respectively, while China’s Shanghai Composite Index jumped by 1.4 percent.

The major European markets also showed strong moves to the upside on the day. While the U.K.’s FTSE 100 Index surged up by 1.1 percent, the German DAX Index and the French CAC 40 Index rallied by 2.6 percent and 2.7 percent, respectively.

You gotta’ love the brilliance of central bankers and their power to blow bubbles up . . . and eventually . . . blow up those same bubbles.

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Stimulus Steps from China and ECB

Today’s initial strength at the open was partly due to news that China’s central bank cut its benchmark interest rates for the first time since July of 2012. The People’s Bank of China reported that the one-year lending rate was reduced by 0.4 percentage points to 5.6 percent, while the one-year deposit rate was lowered by 0.25 percentage points to 2.75 percent.

Taking the lead from where the Federal Reserve went over a decade ago, Chinese leaders are seeking to combat recent signs of sluggishness in the world’s second largest economy.

Peter Boockvar, managing director at the Lindsey Group, said, “The cost of credit in China is now modestly lower but we’ll have to see whether it helps the supply of it and demand for it.”

Big state companies have easy access to credit and it’s why Chinese authorities have taken steps to help small and medium sized businesses,” he added.

Credit for the initial spike in equities today was also attributed to comments from ECB President Mario Draghi indicating that the central bank may broaden its asset purchases in an effort to boost inflation.

We will do what we must to raise inflation and inflation expectations as fast as possible, as our price stability mandate requires of us,” Draghi said.

He added, “If on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialize, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases.”

Analysts reported today that should Draghi follow through on all his promises to purchase vast amounts of government bonds in the Eurozone, then the global monetary party will be “full on and all in“. I say that these are desperate bankers taking desperate measures to postpone desperate economic failures as long as possible. The lack of follow-through as profit taking dominated today’s early spike in prices for the rest of the day only lends credence to my feelings.

Risk Amid Bullish Blue Chips

While the larger stock indexes (think Dow and S&P 500) are bumping out new highs in overbought territory I want to take a moment and review some of the risk that technically exists among the “non-blue-chip” stocks. First, let’s look at the smallest of public companies, the microcap stocks:

41121Microcap

The bullish outlook on these highest risk stocks is that they are near the top of a one-year downtrend channel, looking like they are about to break out of the downtrend. The bearish outlook says that . . .

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