Day 4 Of New Rally Attempt: Strong Week On Wall Street


Friday, October 07, 2011
Stock Market Commentary:

It was another volatile week on Wall Street. The S&P 500 and Russell 2000 fell to fresh 2011 lows on Monday before rebounding and ending the week in the middle of its 2-month base. Friday marked day 4 of a new rally attempt which means the window is now open for this rally to be confirmed with a new follow-through day (FTD) as long as Tuesday’s lows are not breached. However, if Tuesday’s lows are breached the day count will be reset. Earlier this week, the S&P 500 briefly entered bear market territory defined by a decline of >20% from its recent high however quickly bounced back. All the major U.S. averages are decidedly negative for the year and are flirting with bear market territory which is not ideal. Several key risk assets (multiple stock markets around the world, Copper, Crude Oil, etc.) officially entered bear market territory over the in recent months which bodes poorly for U.S. stocks and the global economy. Nearly every day since mid-August, we told you that the major averages were simply rallying (on light volume) towards resistance (50 DMA line) and unless they broke above resistance, the sideways/range bound action would continue. After testing support (2011 lows), the market is bouncing back towards resistance of its wide-and-loose 2-month base.

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Monday-Wednesday’s Action- Stocks

Stocks slid to fresh 2011 lows on Monday after Greece said it will not be able to meet its deficit targets. In the U.S., the ISM manufacturing index topped estimates for 50.5 and came in at 51.6 in September which also topped August’s reading of 50.6. A separate report released by the Commerce Department showed that construction spending also topped estimates with a gain of+1.4% to an annual rate of $799.15 billion in August. However, since the stock market usually discounts 6-9 months in the future any given days economic data has little to do with broader multi-month trends that are in place. I had an exchange with @steveliesman about this very subject today on twitter.

Stocks marked Day 1 of a new rally attempt on Tuesday after briefly flirting with bear market territory. The Commerce Department said factory orders slid –0.2% which is not a “healthy” sign for the economy. Ben Bernanke spent part of the day testifying on Capital Hill but failed to inspire markets. The Chairman of the Federal Reserve said he is ready to take more steps to boost growth if the economy continues to weaken. In other news, Apple Inc. (AAPL) unveiled their much anticipated iPhone 5 which is scheduled to be released later this month.

Stocks rallied on Wednesday but the sad news was that Steve Jobs, Apple’s legendary Co-Founder and Former CEO, passed away after losing his fight with cancer. Before Wednesday’s open, ADP, the country’s largest private payrolls company, said U.S. employers added 91,000 new jobs which easily topped the Street’s estimates. However, last month the company said jobs rose but the Labor Department said zero new jobs were created in August. Elsewhere, the ISM service index topped estimates and rose 3.7 points to 56.5. A reading over 50 indicates growth and bodes well for the ongoing economic recovery.

Thursday & Friday’s Action: BOE & ECB Hold Rates Steady & U.S. Payrolls Report Top Estimates:

Before Thursday’s open, The Bank of England (BOE) and the European Central Bank (ECB) both left interest rates steady and said they are concerned with further downside risks to the economy. ECB President Jean-Claude Trichet said treats the euro zone economy have “intensified.”  This was Trichet’s last meeting before Mario Draghi, currently Italy’s central bank governor, takes over. The Bank of England, in contrast, announced a new plan to inject 75 billion pounds of new money to help stimulate UK’s lackluster economy. So far, the U.S. Fed, BOE, and Switzerland’s Central Bank have announced new measures to stimulate their economies, leaving the ECB as the only major central bank to not take action yet.  In the U.S., weekly jobless claims rose less than expected and are back above the closely followed 400,000 level. The Labor Department said weekly jobless benefits rose by 6,000 last week to 401,000. This fell short of the Street’s estimate for 410,000 claims. Stocks were quiet on Friday after the Labor Department said U.S. employers added 103,000 new jobs in September which easily topped the Street’s estimates. Meanwhile, the unemployment rate held steady at 9.1%.

Market Outlook- In A Correction:

The major U.S. averages are back in a “correction” as they continue to flirt and in some cases hit fresh 2011 lows. Allow us to be clear: If all the major averages break below their 2011 lows, then we will likely see another leg down. Please, trade accordingly! Several high ranked leaders violated their respective 50 DMA lines in late September which bodes poorly for the bulls and suggests the bears are getting stronger. The latest follow-through day (FTD) which began on August 23, 2011 has officially ended which means we will begin “counting” days before a new rally can be confirmed. In addition, it is important to note that the bears remain in control of this market until the major averages trade above their longer and shorter term moving averages (50 & 200 DMA lines). Our longstanding clients/readers know, we like to filter out the noise and focus on what matters most: market action. . If you are looking for specific help navigating this market, please contact us for more information.

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