Bad News is Good News - Stocks Gain on ECB's "Unlimited" Bond Purchases, Weak U.S. Employment News

U.S. Equity Market Radar (September 10, 2012)

The S&P 500 Index rose 2.75 percent this week as the markets embraced policy action from the European Central Bank (ECB) and expectations that the Fed will act next week. The ECB announced “unlimited” sovereign bond purchases out to three years for countries that meet certain conditions. This policy will allow troubled governments additional time to get their fiscal house in order. The other key element to this policy is it continues to build the ECB’s credibility, as it has been able to do what it outlined a month ago. Weak economic data here in the U.S. added to expectations that the Fed would implement a third round of quantitative easing next week, which boosted the market. These events allow the market to look across the valley and focus on improving fundamentals over the next 6-12 months.

Strengths

• Financials rose 3.6 percent, leading the way with central bank policy as the primary driver. Morgan Stanley, Bank of America and Goldman Sachs all rose by more than 10 percent.
• Cyclical sectors were strong this week with the materials sector just a touch behind financials. Steel and metal related stocks tended to be the biggest gainers with Cliffs Natural Resources, Freeport-McMoran and Allegheny Technology all rising by more than 8 percent. The leader was Owens-Illinois whose new CFO confirmed the company’s third quarter guidance.
• Alpha Natural Resources was the best performer in the S&P 500 this week rising by 16.16 percent. Coming into the week the stock was down more than 70 percent year-to-date and this appears to be a “risk on” bounce.

Weaknesses

• Defensive sectors were the laggards this week as the “risk on” trade roared back. Consumer staples rose 58 basis points this week in mixed trade.
• The utilities sector lagged for the fourth week in a row as the market continued to rotate into other areas.
• Advanced Micro Devices was the worst performer this week in the S&P 500, falling by more than 7 percent on news that Intel slashed third quarter revenue expectations by about $1 billion on weak PC sales.

Opportunity

• The market reacted very positively to this week’s ECB announcement, hitting a four-year high. If the Fed follows up with additional easing next week, the market would likely positively respond.

Threat

• Inaction by the Fed next week would be the short-term threat while Europe remains the longer-term wildcard.