Thursday, June 30th, 2016

Stocks surge as US economy grows 2.5 percent

Stock are surging in broad based market rally on news about Europe’s debt crisis that has been adequately handled by 17 Eurozone countries with a massive $1 billion plus Euro package. Greece debt is getting addressed which has been harking our stock market for the last 2 years. It is seemingly possible that bondholders may have to take haircuts of as much as 50 percent. Efforts to recapitalize Banks, is in the works, and we will know more about it in the next month of November or thereafter.

David Smith of Rockland Trust investment Management said “There has been a risk of a very serious issue if the European financial system were to get worse, but now we have a plan in place that I believe will rectify the situation,”. There are signs of optimism and the stocks acknowledged it with a across the board surge and the Dow is up 3 percent in fast trade.

On the domestic front, a better than expected GDP number of 2.5 percent growth also came in as catalyst to spread more giddiness in the buying surge. These numbers genuinely prove that US economy is far above the threshold of a second recession as Doomsday Sayers have been arguing. Their arguments of double dip recession have fallen flat, in the wake of new data. The economy is moving and should finish the last quarter of 2011 on the same clip.

SPX has clearly broken out here to the upside for the first time in 3 months well above the 200 day moving average, and sliced through the upper channel held at 1220. This puts the game in a different motion and the momentum is clearly to the upside make no mistake. The shorts and bears are squeezed, have lost lot of money, and gone back into their holes.

The break above the 200 day moving average is significant, and from a Technical point of view it a confirmation that more higher numbers are in the cards in next 2 months as the year end rally matures during Christmas time. The Summer of doldrums and a horrific August will still stay as memories and not forgotten, but its always prudent to step aside and not trade when the tide is against you. Big money is made to the upside and not the downside which always fraught with minefields unless you are good at shorting in volatile markets.

Buoyed by a strong consumer demands GDP should keep growing more over the next two quarters. Retails and restaurant sectors are more desirable. Consumer spending is 70 percent of the US economy and the better than expected quarterly growth came after a period of anemic numbers in the first half of the year, where the GDP stalled at mere 0.8 percent, sabotaged by the Libyan war and consequential run into higher gas prices. Economists expect a modest 2.5% growth in near future even though the consumer confidence has fallen in the last month to lowest levels in 2 years. There is a divergence between consumer confidence, and consumer spending at this time.

Combine the effect of settlement of Europe debt problems and a good GDP number and the stocks surged higher taking out a key Technical level and handed the momentum to the bulls.

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