EU Worries Weigh On Markets

DAX - New Base Forms
DAX - New Base Forms

Thursday, November 17, 2011
Stock Market Commentary:

The S&P 500 and Nasdaq Composite are back in negative territory for the year as investors continue to digest the latest headlines out of Europe and the latest (in most cases, stronger than expected) economic data from the U.S. 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, not stand in the way of them.  Stocks confirmed their latest rally attempt on Tuesday (10.18.11) day 12 of their rally attempt when the SPX and NYSE composite scored proper follow-through days (FTD).  It is important to note that every major rally in history began with a FTD but not every FTD leads to a new rally and the current rally is under pressure. That said, one can err on the bullish side as long as the major averages remain above their 50 DMA lines.

Fitch Might Downgrade U.S., France & Germany Disagree, & U.S. Economic Data Tops Estimates:

Stocks fell on Thursday after rumors spread that Fitch, a popular rating agency, said they might downgrade the U.S. on fears of EU contagion and Germany and France disagreed over how the European Central Bank (ECB) should handle the debt crisis. Investors were still focused on Europe as Germany and France clashed over whether the ECB should take stronger action to tackle the debt crisis. Elsewhere, yields on Spanish debt soared as Spain appears to be the next European domino that might fall. Surprisingly, economic data in the U.S. topped estimates which bodes well for the ongoing economic recovery. The Labor Department said weekly jobless claims slid 5,000 to a seasonally adjusted 388,000 last week which was a fresh 7-month low and topped the Street’s forecast for higher reading of 395,000. The Commerce Department said housing starts fell -0.3% to a seasonally adjusted rate of 628,000 units in October which was better than the Street’s forecast for starts to fall to 610,000. Finally, the Philly Fed Survey, which measures the pace of factory activity in the Mid-Atlantic region, fell to 3.6 in November which was slightly below the average estimate of 8.0.

Market Outlook- Rally Under Pressure:

The current rally is under pressure due to the recent sell off which sent the SPX below 1230 and erased half of October’s gains. This means that caution is king until the bulls regain control of this market. In addition, it is important to note that the bulls failed to send the major averages above their respective 200 DMA lines and the neckline of their ominous head-and-shoulders top pattern (1250) in late October. 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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