Day 1 Of A New Rally Attempt


Monday, January 25, 2010
Market Commentary:

Stocks closed with modest gains on Monday as fears subsided that Ben S. Bernanke may not be reconfirmed as chairman of the Federal Reserve. Volume was reported lower than Friday’s session on the Nasdaq exchange and on the NYSE which suggested large institutions were not aggressively buying stocks. Monday’s gains were enough to mark Day 1 of a new rally attempt for the major averages. Advancers led decliners by a 23-to-16 ratio on the NYSE and were about even on the Nasdaq exchange. There were only 7 high-ranked companies from the Leaders List that made a new 52-week high and appeared on the BreakOuts Page, higher than the 4 issues that appeared on the prior session. New 52-week highs still outnumbered new 52-week lows on the NYSE and on the Nasdaq exchange.

Hong Kong Stock Market Falls -10% From Recent High:

On Friday, January 22, US stocks ended their 46 week rally and entered a correction when all the major averages plunged below their respective 50 DMA lines. Since the March 2009 low, none of the major averages fell more than -10% from their post recovery highs which reiterates how strong this market actually is. Even other developed markets overseas have performed rather well over the past 10 months. However, the Hang Seng Index, Hong Kong’s stock market, fell -10% from its recent high which could drag the rest of the world lower if the selling continues.

Earnings Data:

The latest round of corporate earnings continue to top analysts’ estimates but fail to impress Wall Street. This week alone, more than 130 companies in the benchmark S&P 500 are slated to report their Q4 results. Barring some unforeseen event, earnings will have expanded nearly +70% and snapped a record nine-quarter losing streak. Longstanding readers of this column know that in addition to analyzing the numbers we pay equal, if not more, attention to how the market reacts to the numbers. So far, the reaction has been tepid at best.

Existing Home Sales Plunge:

On the economic front, existing home sales plunged in December and missed estimates even though home prices held steady during the month. The report showed sales skidded -16.7% for the largest monthly drop in over 40 years! Meanwhile, the annual rate of 5.45 million units fell short of the Street’s estimate for 5.90 million. The data showed that sales plunged across all regions of the country, especially the Midwest, and were split evenly between single-family homes, down -16.8% to a 4.79 million rate, and condos, down -15.4% to 0.66 million. However, investors were pleased that prices actually rose +4.9% on the median to $178,300 and up +6.4% on the average to $225,400.

Market Action: Day 1 of a New Rally Attempt, Market 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 increases 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 then there will be a lot of technical damage on the chart. So far, the market’s reaction has been poor to the latest round of economic and earnings data which remains a concern. Remember that the recent series of distribution days coupled with the deleterious action in the major averages suggests large institutions are aggressively selling stocks which warrants caution.  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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