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Friday, October 14, 2011
Stock Market Commentary:

Stocks continued their October rally and ended near the highs for the week after Google (GOOG) and retail sales topped estimates. Friday marked day 9 of a new rally attempt which means the window remains open for a proper follow-through day (FTD) to emerge. All we need to see is a rally of at least +1.7% on heavier volume than the prior session to confirm a new rally. On a positive note, the major averages are in the process of tracing out a bullish double bottom (W) pattern (shown above). In early October, the S&P 500 briefly entered bear market territory defined by a decline of >20% from its recent high however the bulls quickly showed up and defended that level. The Dow Jones Industrial Average and Nasdaq composite are now positive for the year which is an encouraging sign. However, the other popular averages are still in the red which is not ideal. Several key risk assets (multiple stock markets around the world, Copper, Crude Oil, etc.) officially entered bear market territory over the in recent months which bodes poorly for U.S. stocks and the global economy. Nearly every day since early-August, we told you that the major averages are trading between support and resistance of their 2-month base and until they break above resistance or below support expect this very sloppy trading range will continue. Put simply, after testing support (2011 lows), the market is now bouncing back towards resistance (September’s highs) of its wide-and-loose 2-month base.

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Monday- Wednesday’s Action:

Stocks rallied sharply on Monday (Columbus Day) but failed to produce a sound follow-through day (FTD) to confirm their latest rally attempt (b/c volume was lighter than Friday). Over the weekend, Germany and France agreed to another bailout to help Greece work though their financial woes. Also, Dexia, the large toxic EU bank, was broken up and sold which helped avoid another “lehman-type” crisis. So far, analysts believe that the average company in the S&P 500, excluding financials, may have increased earnings by +14% in Q3. If that occurs, that will be the smallest gain since the end of 2009 according to data Remember, after analyzing the actual results, it equally important to see how the individual stock and broader averages react to the numbers. This is a great “tell” on how investors digest Q3 earnings.

Stocks were quiet on Tuesday as investors waited for Slovakia to vote on enhancing the EU bailout fund and for Q3 earnings season to begin. Slovakia is the only country that has not ratified the enhanced European bailout fund. The consensus is that Greece will receive its next rescue loan in early November. We find it very interesting to see everyone focus on Greece when that does not even address the larger problem- that the other PIIGS are broke. After Tuesday’s close, Alcoa Inc. (AA) kicked off earnings season with a large”miss” but it was encouraging to see the major averages shake it off and move higher despite the weak data.

On Wednesday stocks rallied after European Commission President Jose Manuel Barroso presented a plan to recapitalize E.U. banks. Elsewhere, Slovakian lawmakers met again to pass a bill to enhance the euro-zone’s bailout fund. Slovakia’s Parliament rejected the plan on Tuesday. In the U.S., the Fed released the minutes of its latest meeting which largely reiterated its recent stance. We would be remiss not to note that in the past 9 sessions (since the October 4 near term low) the benchmark S&P 500 has surged over +13%! That tops the 13% gain enjoyed during all of last year! However, volume has declined during the past week and we are sitting near September’s highs (prior area of resistance) which is not ideal. Needless to say, it will be interesting to see how this plays out.

Thursday & Friday’s Action- Earnings Mixed; Economic Data Tops Estimates:

Before Thursday’s open, the Labor Department said weekly jobless claims slid last week by 1,000 to 404,000. This was still above the closely followed 400,000 mark. Elsewhere, the US trade balance fell but the gap with China grew, again. The trade deficit fell in August but the imbalance for the year is still above last year’s level while the trade gap with China hit an all-time high. The Commerce Department said the deficit fell to $45.61 billion in August which was the lowest gap in four months. So far the 2011 deficit is running at an annual rate of $564.3 billion, or +13% higher than 2010’s levels. A higher deficit tends to impede economic growth because that means fewer jobs for U.S. workers. Google smashed estimates when they released their Q3 results on Thursday. On Friday, retail sales topped estimates which helped the market gap up at the open.

Market Outlook- In A Correction:

The major U.S. averages are still in a “correction” as they continue to bounce towards resistance of their 2-month base. The latest follow-through day (FTD) which began on August 23, 2011 has officially ended which means we will continue “counting” days before a new rally can be confirmed. In addition, it is important to note that the bulls scored a victory since many of the major averages closed above their downward sloping 50 DMA lines for the first time since late July! The next stop is September’s highs and then their 200 DMA lines. Our longstanding clients/readers know, we like to filter out the noise and focus on what matters most: market action. If you are looking for specific help navigating this market, please contact us for more information.

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