46 Week Rally Ends; Market In A Correction

Friday, January 22, 2010
Market Commentary:

Stocks got smacked during this shortened holiday week as investors digested a slew of earnings and economic data. Volume was reported lighter than Thursday’s session on the Nasdaq and on the NYSE which helped the major averages avoid a distribution day. However, the fact that all the major averages are now negative for the year, negatively reversed on a weekly and monthly basis, and closed below their respective 50 DMA lines suggests the market is in a correction. Decliners trumped advancers by over a 4-to-1 ratio on the NYSE and by almost a 3-to-1 ratio on the Nasdaq exchange. There were only 4 high-ranked companies from the CANSLIM.net Leaders List that made a new 52-week high and appeared on the CANSLIM.net BreakOuts Page, sharply lower than the 15 issues that appeared on the prior session. New 52-week highs still solidly outnumbered new 52-week lows on the NYSE and on the Nasdaq exchange.

Week in Review Tues- Fri

US Markets were closed on Monday in observance of the MLK holiday. Buyers showed up on Tuesday and sent stocks soaring in anticipation of a Republican win in Massachusetts. However, volume was lower than the prior session which suggested that large institutions were not aggressively buying stocks. This notion was confirmed on Wednesday when stocks fell in heavy volume. Over the past few days, several high profile companies released lackluster Q4 results which sent stocks lower. For the week, over 60 companies in the S&P 500 reported their fourth quarter results and the fact that the major averages are lower suggests investors are not happy with the results. The latest estimates suggest that earnings rose +67% last quarter which will snap a record nine quarter losing streak. Analysts believe that first quarter earnings will rise +30% as the economy continues to improve. The benchmark S&P 500’s valuation rose 25 times its companies’ reported operating profits which is the highest level since 2002! It will be very interesting to see how stocks react over the next few weeks as companies continue reporting their Q4 results.

China’s Explosive Economy:

On the economic front, China said it will begin taking aggressive measures to curb its explosive economy. On Wednesday, China said that it will restrict overall credit growth to 7.5 trillion yuan ($1.1 trillion) in 2010. China’s banking regulator, Liu Mingkang, said some lenders were asked to curb their lending practices because they failed to meet regulatory requirements, specifically on their available capital. On Thursday, China said that its economy surged +10.7% in the fourth quarter which topped the Street’s +10.5% estimate. On Friday, investors feared that China’s central bank may begin raising rates to curb its uncomfortably strong economy. The fundamental concern here is that if China’s economy begins to slow than the global recovery will be adversely affected which increases the odds for a double dip recession.

U.S. Economic Data:

Domestically, a slew of economic data was released during the shortened holiday week: a weaker than expected Producer Price Index (PPI), a mixed reading from the ailing housing market and weakness in retail sales. Producer prices slowed sharply in December which helped relieve inflation woes and ease pressure on the Fed to begin raising rates in the near future. Housing starts fell but building permits rose which helped offset the negative reading. Meanwhile, the Redbook, which measures sales at chain stores, discounters, and department stores, fell in the prior week which suggests that retailers are having a tough start to the new year. Perhaps the most ominous data point occurred on Thursday when President Obama slapped banks with new regulations on their proprietary trading. Prop desks are some of the most profitable components of these large banks and the threat of new regulation sent a slew of financial shares tumbling.

Market Action: Rally Under Pressure

The major averages and leading stocks are now in a correction as the major averages sliced and closed below their respective multi month upward trend lines and their 50 DMA lines on Friday. So far, the market’s reaction has been tepid at best to the latest round of economic and earnings data. The recent series of distribution days coupled with the deleterious action in the major averages suggests large institutions are aggressively selling stocks.  The market just ended its 46th week since the March lows and we are now waiting for a new follow-through day to be produced before resuming any buying efforts. Until that occurs, patience is key, and the path of least resistance is down. Trade Accordingly.