Day 9: Investors Digest A Slew of Economic & Earnings News

Thursday, February 18, 2010
Market Commentary:

Investors digested a slew of economic and earnings news on the 9th day of the current rally attempt. The earnings and economic news of the day sent mixed economic signals. Retail giant Wal-Mart (WMT) gapped down and sliced below its 50 DMA line after reporting tepid Q4 results. Earnings rose +9% while sales rose +1% vs. the same period in the prior year. While this was a strong improvement from the first three quarters of 2009, analysts were expecting better results. Barring some unforeseen event, the average company in the benchmark S&P 500 grew its earnings close to +70% last quarter which snapped a record nine quarter losing streak.

Fed Unexpectedly Raises Rates From +0.50% to +0.75%:

The Federal Reserve shocked investors when it unexpectedly raised its discount rate, the interest rate it charges banks for emergency loans, from +0.50% to +0.75%. The rate hike will be effective on Friday. 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.”

Tepid Economic News:

The news on the economic front was lackluster at best. 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.

Market Action- In A Correction:

Looking at the market, the major averages continue to trade near their respective 50 DMA lines as they consolidate their recent move. Remember that as long as 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 breakout of sound bases. However, if the February 5, 2010 lows are breached then the day count will be reset and a steeper correction may unfold.

It is also important to see how the major averages react to their respective 50-day moving average (DMA) lines which were support and are now acting as resistance. 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 which remains a concern. Remember that the market remains in a correction until a new new follow-through day emerges. Until then, patience is paramount.

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