Day 2 Of A New Rally Attempt

Tuesday, February 2, 2010
Market Commentary:

Stocks and commodities rallied as the dollar fell for a second consecutive day after healthy news from the ailing housing front was released and the Australian central bank unexpectedly left interest rates steady. Volume was heavier than the prior session on the NYSE and Nasdaq exchange which signaled large institutions were buying stocks. Advancers led decliners by over a 3-to-1 ratio on the NYSE and by a 5-to-4 ratio on the Nasdaq exchange. There were 17 high-ranked companies from the CANSLIM.net Leaders List that made a new 52-week high and appeared on the CANSLIM.net BreakOuts Page, higher than the 7 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.

Australia’s Central Bank & The US Dollar:

Overnight, the Reserve Bank of Australia left rates steady at +3.75% which surprised a slew of economists and analysts across the globe. Nearly everyone believed that Australia would raise rates to combat inflation. This allayed pressure on other central bankers to start raising rates as we make our way out of the worst global recession since WWII. The Street believes that the European Central Bank (ECB) and the Bank of England (BOE) will keep borrowing costs unchanged when they meet later this week. The dollar fell for a second straight day which sent a host of dollar denominated assets higher on Tuesday.

Pending Home Sales & Strong Earnings From D.R. Horton:
Stocks caught a bid after the National Association of Realtors said pending home sales rose +1% in December to 96.6. The pending home index was developed as a leading indicator of housing activity for existing homes, not new homes. Furthermore, a pending sale is booked when a contract is signed, but not yet closed. Normally, it takes anywhere from four to six weeks to close a contracted sale. Housing stocks also rallied after D.R. Horton (DHI X%), one of the country’s largest homebuilders, reported its first quarterly profit in several years.

Busy Day On Capital Hill:

It was a busy day on Capital Hill as both Paul Volcker, head of the U.S. Economic Recovery Advisory Board, and Treasury Secretary, Timothy Geithner testified before Congress. Volcker repeated his view that the government should prohibit commercial banks from owning hedge funds and limit their ability to trade for their own accounts to help mitigate risk at these financial powerhouses. Geithner said that the US must lower its deficit as the economy recovers.

Market Action- In A Correction:

Looking at the market, Tuesday marked Day 2 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-day moving average (DMA) lines. Until they all close above that important level the technical damage remaining on the charts is a concern. 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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