Day 3 Of A New Rally Attempt

Wednesday, February 3, 2010
Market Commentary:

The major averages ended mixed as the dollar rallied after the latest round of disappointing earnings and economic data was released. Volume was lighter than the prior session on the NYSE and Nasdaq exchange which signaled large institutions were not aggressively selling stocks. Decliners led advancers by nearly a 3-to-2 ratio on the NYSE and on the Nasdaq exchange. There were 10 high-ranked companies from the CANSLIM.net Leaders List that made a new 52-week high and appeared on the CANSLIM.net BreakOuts Page, lower than the 17 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.

ADP- -22,000 Jobs Shed In January:

Before Wednesday’s opening bell, ADP, the country’s largest private payrolls company, said US employers cut -22,000 jobs last month which matched forecasts. Now investors are waiting for Friday’s official jobs report slated to be released this Friday at 8:30 am EST. Many pundits believe that US employers added jobs which would be the second monthly increase in three months.

Earnings Fail To Impress:

The latest round of earnings from several high profile companies disappointed investors as many companies cut their 2011 and 2012 estimates. Pfizer Inc. (PFE) gapped down and closed just below its 50 day moving average line after reporting a +34% increase in sales compared to the same quarter in the prior year but earnings slid -25%. Earnings continue to be reported in droves as over half of the companies in the S&P 500 have released their Q4 results. Barring some unforeseen event, earnings rose over +70% last quarter which will snap a record nine-quarter earnings slump for S&P 500 companies.  So far, nearly +80% of companies that have released their Q4 results topped estimates. However, the fact that stocks are down since earnings season began suggests investors are not happy with the results.

Economic Data: ISM Shows Growth, Misses Estimates:

On the economic front, the Institute for Supply Management (ISM) said its non manufacturing index (a.k.a service-index) rose to 50.5, which signaled growth but trailed estimates. Readings above 50 suggest growth while reading below 50 indicate contraction. Even though the number topped 50, it trailed estimates which led many to question the health of this recovery. 

Market Action- Market In A Correction:

Looking at the market, Wednesday marked Day 3 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 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.