State of the Stock Market Analysis for the Week Ending August 9th, 2014 (Up-down-up-down-up Week for Stocks 8-9-14)
Up-down-up-down-up Week for Stocks

It was a rough week for the stock market as we saw an “up-down-up-down-up” week. Every day actually alternated in that exact sequence, but when the closing bell rang following Friday’s strong rally, all three of the major indices were in green territory. The Dow and S&P 500 posted weekly gains of 0.3%, while the Nasdaq rose by 0.4%. It turned out to not be that bad of a week considering all of the global tensions that we are currently seeing.

Friday was particularly strange in that U.S. stocks and Treasuries rallied in a big way, following news that President Obama had given the okay for U.S. planes to bomb insurgent Muslim rebels in Northern Iraq. Seeing Iraq destabilizing after so much U.S. and allied efforts (and money) is disheartening and sad. It is increasing the possibility of greater instability in the region, which is always a potential threat to global oil supplies.

Iraq was in the news in a big way, but we saw Mr. Putin over in Russia easing up Russia’s military posturing against Ukraine and the West. The media barrage of sanctions, military threats and mean-spirited rhetoric between Russia and the West is somewhat confusing in its scope, and the Western media does not seem to be offering that clear of an explanation of what it all means and how it will ultimately affect financial markets and the politics of the many involved nations.

Meanwhile, over in the Middle East, a recent cease fire had cooled the area off a bit, although Hamas was reported to have begun firing rockets again at Israel. Israel’s goal of destroying Hamas’s tunnel system continues, and it looks as though it will really cripple Hamas’s ability to rain missiles down on Israelis. This makes for three, red-hot global hotspots, and for all of the saber-rattling, the negative effects on global financial markets was relatively minimal this week.

In terms of U.S. economic news, we are seeing ongoing improvement in the economy, although the general vibe of the news is mixed. It is good, but not great, and that is just enough to keep investors from panicking. We did see the Volatility Index (VIX) top 17 during late-Thursday’s downward swoon, and it popped above 17 again Friday morning. Friday’s rally settled things down, though, and we finished the week with the VIX at 15.77. Stocks were clearly spooked this week, but seeing the market finish on such a positive note had bulls breathing a big sigh of relief when FridayÔÇÖs session ended.

So, what is in store for us next week? Well, despite all of the global shocks, the price of oil remains below $100 per barrel. This is a huge plus for the global economy since a surge in oil prices (remember $140 per barrel about six years ago?) could wallop economic growth, and possibly send us back into recession. As long as global conflicts do not spin out of control and turn into “hot” wars, then the price of oil should remain calm, cool and collected, which is ultimately good for stocks.

The other “plus” we are seeing is the ongoing dive in the yield of 10-year U.S. Treasuries, as money flows around the globe looking for a “safe haven.” This drove the 10-year yield to as low as 2.35% this week, before it finally finished the week around 2.42%. This actually gives the Federal Reserve a lot of cover if and when it starts to raise interest rates. The Fed might want to sneak in a couple hikes while rates are so low, and then hope that it will avoid the spotlight when long rates actually DO start heading higher.

Either way, ultra-low interest rates are keeping a lid on home and auto loan rates, and that is generally a plus for the broader consumer economy. It is more misery for anyone with a money market account or a bank CD, though, but the Fed has made it clear that painfully enough, savers are the LAST of the Fed’s concerns. That said, the bulls are hoping that Friday’s bounce continues into next week. The Gorilla wishes each and all a wonderful weekend, and we will be back in action on Monday.

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