State of the Stock Market Analysis for the Week Ending January 31st, 2016 (Stocks Have Rough and Tumble WeekĀ 1-31-16) All You Need Is Jobs

Bulls were hoping for a strong finish to a tough week, and somehow it happened. Despite the Fed’s mixed messages after its comments on Friday, investors took it as a plus and stocks headed resoundingly higher. It turned out to be a decent week for the stock market, and after the dust had settled on Friday, we saw some solid weekly gains of 2.3% for the Dow, 1.8% for the S&P 500 and 0.5% for the Nasdaq. It was not a pleasant week for the bullish crowd, but Friday’s strong close was a fitting and positive end to a very rough month for the stock market.

The monthly numbers were nothing to write home about, though, and it was the worst January performance for the stock market in years. For the month, the Dow was down 5.5%, the Nasdaq was down 7.9%, and the S&P 500 was off by 5.1%. The so-called 10% “correction” has occurred, and Friday’s moonshot bounce suggests that the worst might be over and finally in the past. We have so far re-tested the late-August lows and have bounced, which has bulls thinking that we might have bottomed near-term. The key now is not to have any new surprises to upset the rebound.

What was most notable on Friday was the move by the Bank of Japan to lower its rates into negative territory. Granted that it was just a negative 0.1%, but it had Japan join several other EU nations with negative rates. The move was pure QE, and it showed that Japan is pulling out all stops to reinvigorate its stagnant economy. It helped bump up the Nikkei and Shanghai indices on Friday to the tune of 2% to 3%, and that helped U.S. stocks find the energy on Friday to rally in a big way to end the week. The key for the stock market now is to build that current base and rally next week.

The U.S. Federal Reserve remains in the crosshairs from here, and seeing Japan lower rates at the same time the Fed is hinting at rate hikes is an issue. The Fed did not raise rates at its meeting this week, and it did back off from its rhetoric about future rate hikes, but it remains fairly hawkish. The Fed does not meet again until mid-March, so that gives it a lot of time to digest the data before its March decision. The fact that Japan and the ECB are leaning toward further interest rate cuts and QE runs counter to what the Fed has in mind, so that will remain as a big theme in the weeks ahead.

As for earnings reports, it is getting difficult to make much sense. On earnings news, Facebook (FB) soars one day, and Amazon (AMZN) falls dramatically the next. Banks and financial companies continue to come in mixed, and that has been weighing on the overall confidence levels in the stock market. It has been a “hit and miss” season for earnings, which is playing a role in keeping the broader stock market in its current correction mode. Fears of a global economic slowdown and the strong dollar are weighing on U.S. multinationals, so we will have to wait and see how the rest of earnings season unfolds.

The price of oil seems to have halted its downward slide, as oil was actually up by about 1.5% on Friday. Oil is back up toward $34 per barrel, which seems to be calming fears that we were headed toward $20 per barrel as some strategists had predicted. The “doom and gloom” crowd has warned that oil below $40 per barrel was dangerous for the global economy, but seeing oil stabilizing right now above $30 per barrel is a plus. This might have played into the late-week rally we saw in the stock market, so few bulls are complaining.

So, on we head toward February after a January that felt in many ways like an October. Real estate and the housing market are relatively strong, and consumer confidence is holding up fairly well, and that bodes well for the broader economy. We get employment numbers next Friday, which should give us and the Fed a clearer picture on the U.S. economy. In the meantime, we did get a resounding bounce in the stock market on Friday, which was a great way to head into the weekend. The Gorilla wishes each and all a relaxing weekend, and we will be back in action on Monday!

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