28-Week Rally Ends; Day 1 Of New Rally Attempt

Friday, March 11, 2011
Stock Market Commentary:

Stocks fell into a correction this week, effectively ending their 28-week rally which began on the September 1, 2010 follow-through day (FTD). The current crisis in the Middle East remains in flux which is putting upward pressure on oil and gold and downward pressure on equities. However, the big news of the day was the devastating earthquake in Japan which sparked Tsunami’s across the entire Pacific! The benchmark S&P 500 is up nearly 100% from its March 2009 low, and still about -16% off its all time high from October 2007. On average, market internals remain healthy as the major averages struggle to find support near their respective 50 DMA lines.

Monday-Wednesday’s Action: Stocks Drift Lower As Oil Rallies

On Monday, stocks negatively reversed (opened higher but closed lower) after Moody’s Investors Service cut Greece’s credit rating and crude oil approached $108/barrel. Oil prices surged to fresh post-recession highs as forces loyal to Moammar Gadhafi pounded rebels near key oil reserves all week in Libya. U.S. gasoline prices have also jumped markedly over the past few weeks as oil jumped over 20% and democracy spreads in the Middle East. AAA reported that gas prices have jumped an average of $0.39 cents per gallon since the Libyan crisis began in mid-February.  Analysts believe that the jump in gas prices are causing motorists to pay an additional $146 million per day for using the same amount of fuel which eventually will have an adverse effect on the economy. The national average price at the pump topped $3.509 per gallon which serves as an indirect tax on both consumers and businesses.

Stocks snapped a two-day losing streak on Tuesday after oil prices eased from post-recession highs and speculation spread that Sprint would be T-Mobile from Deutsche Telekom AG. On Wednesday, stocks fell after mortgage apps and wholesale inventories rose. The Mortgage Bankers Association’s index of loan applications vaulted +16% during the first week of March. The stronger than expected number was the first piece of good news from the ailing housing sector in weeks. Elsewhere, the Commerce Department said wholesale inventories topped estimates in January. Wholesale inventories rose +1.1% which easily topped the median projection in a Bloomberg News survey for a +0.9% rise. The report also showed that sales rose +3.4% in January, led by technology, automobiles, and commodities.

Thursday & Friday’s Action: Fears of Demand Destruction Pound Stocks:

Before Thursday’s open, the Labor Department said jobless claims rose by 26,000 to 397,000last week. This topped the Street’s estimate of 376,000, and bodes poorly for the ailing jobs markets. Elsewhere, the Commerce Department said the U.S. trade deficit widened more than expected in January. Imports surged largely due to extremely high crude oil prices and overshadowed record exports. Imports rose +5.2%, which is the most since March 1993, while exports grew +2.7%. Meanwhile, China’s trade deficit unexpectedly rose as exports fell which bodes poorly for the global economic recovery. Both stocks and a slew of commodities plunged on the news as fear spread that weaker economic growth may destroy demand. Stocks were quiet on Friday after Japan’s massive earthquake sparked a series of Tsunami’s across the Pacific.

Market Action- Market In A Correction; Week 28 Ends

All the major averages sliced below their respective 50 DMA lines on Thursday, March 10, 2011. Then, on Friday, all the major averages except for the tech-heavy Nasdaq composite managed to repair that damage and close above their respective 50 DMA lines which was a healthy sign. Therefore, Friday, March 11, 2011 marked Day 1 of a new rally attempt which means the earliest a possible FTD could emerge would be Wednesday, providing Friday’s lows are not breached. If, however, Friday’s lows are breached, the Day count will be reset and odds will favor lower prices will follow. The market is in a correction which underscores the importance of raising cash and playing strong defense until a new FTD emerges, if your stocks get in trouble. If you are looking for specific help navigating this market, please contact us for more information.

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