Monster Week On Wall Street!

SPX Closes Below Resistance
SPX Closes Below Resistance

Friday, December 2, 2011
Stock Market Commentary:

Risk assets surged during the first week of December as fear of a EU collapse eased and several Central Banks across the globe flooded the system with liquidity. From our point of view, the market confirmed its latest rally attempt on Wednesday, November 30, 2011 when all the major averages soared over +4% on monstrous volume in response to the global central banks coordinated efforts to flood the world with liquidity. There have been a few isolated instances in history where a new follow-through day (FTD) emerges on Day 3 which validates Wednesday’s healthy action. 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.

Monday-Wednesday’s Action: Stocks Surge!

Stocks surged on Monday after rumors spread that European officials were working on a new super-deal which would save the ailing Euro from imploding. Germany and France, Europe’s two strongest economies, are trying to work on a more rapid solution for the euro-zone’s fiscal woes. In Italy, the newly appointed prime minister is working towards a new plan that will help shore up the country’s finances. A spokesperson for the IMF confirmed that they are working with the Italian government to avoid the country defaulting on its debt. The IMF is ready to loan Italy up to 600 billion euros ($798 billion) after Italian daily newspaper La Stampa broke the story. Separately, the Organisation for Economic Co-operation and Development (OECD) said the euro zone already entered a mild recession due to their massive debt crisis and the U.S. may be close to entering one as well.

After Monday’s close, Fitch, one of the three most popular rating agencies, downgraded their outlook for the U.S. credit rating to negative and said that the downgrade was due to the failure of the super committee in congress to pass a bill to curb the 15T deficit. Fitch gave the U.S until 2013 to curb their ballooning budget deficit or lose their AAA status. Remember there are two components to a country’s ratings. First, the actual rating and second, the outlook. All Fitch did was cut their outlook, not the actual rating. Stocks were quiet on Tuesday after the S&P Case/Shiller index, which measures home prices across the country, slid to -0.6% in September and missed the Street’s forecast for “unchanged.” Meanwhile, the Conference Board said U.S. consumer confidence jumped after falling to a 2.5 year low in November to 56.0 which easily topped the average estimate of 44.0.

Risk assets surged around the globe 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.

Economic data was mixed, the ADP, the country’s largest private payrolls company, said U.S. employers added +206,000 new jobs in November which easily topped the Street’s estimate for +130,000. 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. 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. Finally, pending home sales rose +10.4% in October thanks in part to record low mortgages and falling home prices.

Thursday & Friday’s Action: Stocks Edge Higher On Stronger Than Expected Economic Data:

Risk assets were mixed on Thursday as investors digested Wednesday’s monstrous rally. Overnight, China said its factor index slowed for the first time in three years which added concerns to the global economic slowdown. The report came one day after China’s central bank lowered their reserve requirements to help stimulate their already strong, but slowing, economy. In the U.S., the Labor Department said weekly jobless claims rose 6,000 last week to a seasonally adjusted 402,000. This was higher than the closely watched 400k mark and the Street’s estimate of 390,000. November’s official jobs report will be released before Friday’s open. Elsewhere, the Institute for Supply Management (ISM) said its manufacturing index rose to 52.7 in November which was the strongest level since June and topped the 51.5 forecast. However, the employment component of the report slid to 51.8 from 53.5. The Commerce Department said construction spending rose 0.8% in October which topped the average estimate for 0.3%. Before Friday’s open the Labor Department said U.S. employers added 120,000 new jobs in November and the unemployment rate slid to 8.6%.

Market Outlook- Confirmed Rally

The benchmark S&P 500 (SPX) is near breakeven for the year but the other averages have already 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). However, 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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