Day 1 Of A New Rally Attempt

Monday February 1, 2010
Market Commentary:

Stocks rallied on Monday continuing the recent string of a strong start to the week before the bears show up and send stocks lower by Friday. Volume patterns have turned bearish recently which suggests large institutions are aggressively selling, not buying stocks. New 52-week highs still continue to outnumber new 52-week lows on the NYSE and on the Nasdaq exchange which is a welcomed sign.

Economic Data Is Healthy:

Stocks rebounded from a three-month low and marked Day 1 of a new rally attempt after a series of stronger than expected economic data points were released. Manufacturing reports in the US, Europe and China all showed that the global economic recovery is accelerating which helped allay concerns that it was running out of steam. The US dollar fell which helped a slew of dollar denominated assets (mainly stocks and commodities) rally. The Institute for Supply Management said that US manufacturing enjoyed its largest gain since August 2004 which was a welcomed sign.

Earnings Are Solid:

Exxon Mobil Corp (XOM) gapped higher after the oil giant said earnings fell less than expected because of higher oil prices and output. So far, nearly 80% of the companies that have reported earnings have topped estimates in the fourth quarter which, barring some unforeseen event, will snap a record nine-quarter earnings slump for the S&P 500. Analysts believe that earnings grew +76% in the last three months of 2009 as the global economy continues to rebound from its worst recession since WWII!

Market Outlook: In A Correction

Looking at the market, Monday marked Day 1 of a new rally attempt which means that as long as Monday’s lows are not breached, the earliest a possible follow-through day could emerge will be this Thursday. However, if Monday’s lows are taken out, then the day count will be reset and the chances for a steeper correction increase markedly. It is also important to see how the major averages react to their respective 50 DMA lines. Until they all close above that important level the technical damage remaining on the charts is a concern. Leading stocks have been acting poorly in recent weeks as the selling intensifies. So far, the market’s reaction has been tepid at best to the latest round of economic and earnings data. Remember that the recent series of distribution days coupled with the deleterious action in the major averages suggests large institutions are aggressively selling stocks.  Disciplined investors will now wait for a new follow-through day to be produced before resuming any buying efforts. Until then, patience is key.

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