Day 10: Stocks Rally On This Shortened Holiday Week

Friday, February 19, 2010
Market Commentary- Week In Review:

Stocks rallied on this shortened holiday week as investors digested a slew of economic and earnings news. On Tuesday, stocks rallied after the NY Fed released its Empire State Mfg index which topped the Street’s estimates. This was the fastest reading in four years and the first manufacturing report that was released in February. The stronger than expected results suggest that business conditions are improving which bodes well for the economic recovery. Stocks edged higher on Wednesday after the Federal Reserve released the minutes of last month’s Fed meeting. The minutes showed that Fed officials debated how and when to shrink the central bank’s $2.26 trillion balance sheet. The minutes also showed that some officials want to begin selling assets in the “near future” while others are more content to wait until the economy stabilizes.

Fed Unexpectedly Raises Rates From +0.50% to +0.75%:The big surprise occurred on Thursday when the Federal Reserve unexpectedly raised its discount rate, the interest rate it charges banks for emergency loans, from +0.50% to +0.75%. The Fed said that “The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy.” Two disconcerting economic reports were released on Thursday: jobless claims surged and producer prices topped estimates. The Labor Department said the number of US workers filing new applications for unemployment benefits unexpectedly jumped last week. Initial jobless claims for state unemployment benefits rose +31,000 to +473,000 which paled in comparison to the Street’s estimate of +430,000. Elsewhere, producer prices rose sharply last month which suggests inflation is on the rise. The producer price index topped estimates and rose +1.4% from December. Economists believe that higher energy prices and unusually cold temperatures sent prices higher last month.

On Friday, the Labor Department released its consumer prices index (CPI) which rose in January but trailed estimates. Core prices, which measure food and energy, fell for the first time since 1982 and helped allay inflation woes. Looking at the market, Friday marked day 10 of a new rally attempt which means that as long as the February 5th lows are not breached the window remains open for a new follow-through day (FTD) to emerge. A new follow-through day will confirm the current rally attempt and will be produced when one of the major averages rallies at least +1.7% on higher volume than the prior session as a new batch of leaders break out of fresh bases. However, if the February 5, 2010 lows are breached then the day count will be reset and a steeper correction may unfold. So far, the market’s reaction has been tepid at best to the latest round of economic and earnings data which remains a concern. Remember that the market remains in a correction until a new new follow-through day emerges. Until then, patience is king.

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