State of the Stock Market Analysis for the Week Ending April 26, 2014 (Difficult Week for the Stock Market 4-26-14)

Difficult Week for the Stock Market Gorilla Trades

It was a strange and difficult week for the stock market, especially because of the turbulence in Ukraine. That whole drama is difficult to figure out, and it is weighing on the confidence of European stock markets. It is one of those issues that will likely remain contained and calm, but it is also one of those issues that could escalate to dangerous levels quickly. Ukraine was part of the Soviet Empire for decades, so it is interesting that they are approaching what appears to be a civil war.

Mr. Putin is a cool operator, though, and he does not seem likely to do anything to unravel his country. Russia has enough problems already, and the last thing it needs right now is some sort of civil war. The buzz is that this conflict is ultimately about oil, but it is certainly tough to figure things out, even if you are Russian or Ukrainian. This is spooking global markets enough that everything is sort of on hold. There has been a “flight to quality” to U.S. stocks and bonds, but there are still serious concerns in the Russian region.

The U.S. stock market had a rough Friday, but at least the overall performance for the week was not that bad. When the dust had settled, the S&P 500 was down just 0.1% for the week. The Dow was down 0.3%, and the Nasdaq was down 0.5% for the week. So as you can see, the stock market’s performance was not that bad. Earnings were mixed, and we saw a big selloff in Amazon (AMZN), as it warned about second quarter earnings. Microsoft (MSFT) topped estimates, but that did little to help the broader Nasdaq on Friday.

Consumer sentiment actually came in strong, with the University of Michigan Survey showing an 84.1 reading versus the expected 82.6 number. The number was well above March’s 80.0, which once again suggests that the consumer is back in action and a whole lot more confident than we realized. The key is for this momentum to continue because it will translate into a stronger economy, a stronger housing market, and stronger GDP growth in 2014.

So, what could go right from here? Well, if we can see Europe remains calm, global growth and confidence will likely continue to improve. What could go wrong from here? Well, if we were to see inflation reignite, the Fed would be under pressure to raise interest rates, which could really wallop the stock and bond markets. Once again, the bulls are looking for that proverbial “Goldilocks” economy of not too hot and not too cold, so we shall see how this story unfolds.

The 10% drop in Amazon was interesting because it shows the risks a company faces when it tries anything risky or new. Amazon spoke this week of having its own delivery system of vans and trucks, and it also spoke about “Amazon Fire,” a set top TV box. It is quite innovative and gutsy to come out with these ideas, but it somehow made the market for Amazon stock nervous. Jeff Bezos has played his cards well for the past 16 years, so we will see how these new ideas pan out in the months ahead.

In the meantime, even though it was a difficult week for the stock market, the broader market is holding up well. We have sort of stalled out on the upside, but even after this week’s stubbed toe, we are still very close to all-time highs for the Dow and the S&P 500. We are about half-way through earnings season, and it has been decent. It has not been a home run, but it has been decent. This is ultimately good for the bullish camp as we head toward May, so keep your fingers crossed that a Summer Rally might be on its way. The Gorilla wishes each and all a wonderful weekend!

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