Worldwide rally as China counters market cooling steps

Monday, April 20, 2015 -

US stocks largely recovered Friday’s steep losses led by technology stocks ahead of key earnings announcements.

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Following last Friday’s sell-off, stocks showed a strong move back to the upside during on Monday, offsetting Friday’s losses but still remaining below their recent highs.

Though the indexes moved sideways going into the close, they ended firmly in positive territory. The Dow jumped 209 points (+1.2%) to 18,035, the Nasdaq surged up 63 points (+1.3%) to 4,995 and the S&P 500 climbed 19 points (+0.9%) to 2,100. The NYSE finished at +0.53% and the small cap Russell 2000 at +1.04%.

The strength on Wall Street came amid news of additional Chinese stimulus after reports about new trading regulations in China contributed to the sharp pullback in the previous session – looking like a reactive bi-polar affliction that the markets thought worthy of celebration.

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Earnings pick up pace

Last week’s lackluster bank earnings didn’t do much for the stock market, with the stock market ending on sour note on Friday. However, with several bellwether technology companies on tap this week (who have been aggressively buying back their shares to boost their profits), the central bankers around the world were more positive about taking stakes in some key technology stocks.

The Nasdaq 100 advanced 1.5 percent ahead of IBM earnings announcement after the close. IBM was a text book case who earnings beat much lowered expectations at $2.91 vs $2.80.

50420-IBM-earnings

Revenues fell 11.9%. Yes, a soaring dollar does matter! This is their worst sales since 2002. Yes, but there is still Apple on deck who no doubt will still likely report another excellent quarter with their iPhone 6 product.

Evidence of intervention

However, the stock market was up 230 points on the opening with strong buying coming out of Europe, suggesting the ECB is buying US equities – why not given the falling euro. Combined with promises out of china for more stimulus and we have the typical worldwide celebration of economic weakness.

The irony in China is staggering as their stock market is hotter than seen in any previous period as their economy is in the early stages of another staggering recession – clear evidence of speculative investment rather than fundamental strength.

Today there were no monthly economic reports to speak of to account for today’s rebound.

While the Fed is talking up the need to raise interest rates because they expect a more robust economy in the quarters ahead, you might be interested to know the following.

During Ronald Reagan day, economist Arthur Laffer noted that whenever total federal tax receipts exceed 18% of the GDP, the result has always been a recession for the U.S. economy. Whether that proves true in today’s much manipulated GDP figures is up for debate but this ratio is pushing 19% now.

50420-Taxes-GDP

We are certainly back in a danger zone where the drag of too high taxes now has the economy at a complete stall. For example, the last time the most recent quarterly retail sales and industrial production dropped together like this was in the first quarter of 2009 and we were deep in recession. I could go on and on with economic reports that are slipping into contraction mode.

Investors need to recognize the extreme risk levels at present.

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