New Rally Confirmed: Don’t Fight The Fed!

Wednesday, November 30, 2011
Stock Market Commentary:

Risk assets surged across the globe after several central banks across the world flooded the system with liqudiity to help stimulate the global economy. There have been a few isolated instances in history where a new follow-through day (FTD) emerges on Day 3.  Since Wednesday marked Day 3 of a new rally attempt and markets surged across the globe on heavy volume, we feel the current rally is confirmed. It is important to note that every major rally in history began with a FTD but every FTD does not lead to a new major rally. In addition, since 2008 the percentage of failed FTD’s has surged due in part to the massive volatility we have seen in the major averages.

Global Central Banks Flood The System & U.S. Economic Data Is Mostly Stronger:

Stocks surged on Wednesday after several Central Banks flooded the system with liquidity to spur the global economy. Overnight, China’s central bank lowered their reserve requirement which is designed to stimulate their economy. Shortly thereafter, several of the world’s major central banks including the ECB, U.S. Federal Reserve, Bank of England and the central banks of Canada, Japan and Switzerland agreed to coordinated action to lower interest rates charged on dollar swaps. The goal is to help stimulate the tightening credit markets which in turn should help stimulate the global economy.

News on the economic front was mixed to mostly stronger. ADP, the country’s largest private payrolls company, said U.S. employers added +206,000 new jobs this month which easily topped the Street’s estimate for +130,000, according to a Reuters poll and bodes well for Friday’s official payrolls report which is expected to show a gain of +122,000. Weekly mortgage applications fell for a third straight week which is not ideal for the ailing housing market.  The productivity of U.S. workers rose at a +2.3% annual rate in Q3 after declining for two quarters. Expenses per employee slid at a 2.5% rate which topped estimates. Elsewhere, the Chicago Purchasing Managers Index rose to 62.6 in November from 58.4 in October and was the fastest rate in 7 months. It was also above the boom/bust number of 50 which signals growth. Finally, pending home sales rose +10.4% in October thanks in part to record low mortgages and falling home prices.

Market Outlook- Confirmed Rally

The benchmark S&P 500 (SPX) is still in negative territory for the the year but the other averages have turned positive which suggests we might end this year in the black. For months, we have argued in this commentary that from our point of view, the current EU bailout plan- to use leverage & add more debt to a debt crisis- is foolish at best and does not address the broader issues (i.e. the other PIIGS countries are broke). Finally, others are starting to take notice of this important question. Our job is to trade on what we see happening, not on what we think will happen. We do this by gathering the facts, interpret how the markets react to the news and trade accordingly.  What we have seen from the October 4, 2011 low was simply an over sold bounce into a logical area of resistance (200 DMA line). Looking forward, this sideways action should continue until either support (1074) or resistance (200 DMA line) is breached. Therefore, we have to expect this sloppy wide and loose action to continue until the market closes above its longer term 200 DMA line. 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, feel free to contact us for more information. That’s what we are here for!

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