Dow Closes Below 50 DMA Line on Tepid Earnings & Economic Data


Thursday, 1.21.10
Market Commentary:

US stocks got smacked on Thursday after jobless claims rose and concern spread that China will take more aggressive steps to curb its surging economy. Volume was reported higher on the Nasdaq and on the NYSE which marked another distribution day for the major averages. The higher volume declines suggested that large institutions were aggressively selling stocks. Decliners trumped advancers by over a 3-to-1 ratio on the NYSE and by a 3-to-1 ratio on the Nasdaq exchange. There were 15 high-ranked companies from the Leaders List that made a new 52-week high and appeared on the BreakOuts Page, equal to the total of 15 issues that appeared on the prior session. New 52-week highs still solidly outnumbered new 52-week lows on the NYSE and on the Nasdaq exchange.

China & Jobless Claims:

Overnight, China reported that its economy surged +10.7% in the fourth quarter which was the fastest pace since 2007. The double digit reading topped the Street’s estimate for a +10.5% reading. The stronger than expected result led many to believe that China will continue taking steps to curb its redhot economy which may hinder the global recovery. Elsewhere, the Labor Department reported that jobless claims jumped by +36,000 to 482,000 in the week of January 16. The stronger than expected reading reflects a backlog of applications from the 2009 holiday season. This was the highest level in two months which led many to lower their estimates for this month’s non-farm payrolls report.

Lackluster Earnings Data Hurts Stocks:

The tepid economic data offset better-than-expected results from Goldman Sachs (GS), Ebay Inc. (EBAY) and Starbucks Corp. (SBUX). This week, more than 60 companies in the S&P 500 are slated to report their fourth quarter results which will help investors gauge how companies fared last quarter. The latest estimates suggest that earnings rose +67% last quarter which will snap a record nine quarter losing streak. Analysts believe that first quarter earnings will rise +30% as the economy continues to improve. Last week, the benchmark S&P 500’s valuation rose 25 times its companies’ reported operating profits which is the highest level since 2002!

Market Outlook: Rally Under Pressure

The major averages and leading stocks are pulling back to digest their recent gains as investors make their way through the latest round of economic and earnings data. So far, the market’s reaction has been tepid at best which puts serious pressure on the current rally. Until a clear picture can be formed as to how companies fared last quarter, one could easily expect to see more of this sideways to lower action to continue. The market is in the middle of its46th week since the March lows and the rally remains intact, albeit under serious pressure. The Dow Jones Industrial Average sliced and closed below its 50 DMA line on heavy volume for the first time since October which is an ominous sign. The Nasdaq and the S&P 500 closed above their respective 50 DMA lines which, in the near term, is a healthy sign. Now that the current rally is clearly under pressure one would be wise to adjust their trading/exposure accordingly.

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