Risk Off Week Ends; Support Holds!

SPX- Bull-Bear Traps
SPX- Bull-Bear Traps

Friday, November 18, 2011
Stock Market Commentary:

The S&P 500 and Nasdaq Composite are back in negative territory for the year as investors shrugged off a slew of stronger than expected economic data from the U.S. and focused on fresh concerns that Spain may be the next European domino to fall. 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 (which is currently serving as support).

Monday-Wednesday’s Action: Stocks Fall As Attn Shifts From Greece & Italy to Spain

Over the weekend, Italian PM Silvio Berlusconi stepped down amid pressure that he failed to address their ongoing debt woes. Analysts believe that Italy’s new leader Mario Monti (or Super Mario for short) is expected to form a government of technocrats, not politicians. The purpose is to help the country implement their austerity measures until elections can be held in 2013. However, stocks turned lower after German Chancellor Angela Merkel’s ruling Christian Democrats Union party passed a bill which would allow any country to leave the euro zone. This was the first tangible step towards a new two-tier Europe. The goal would be a region with and without the euro currency.  Risk assets fell for a second straight day on Tuesday as fear spread that a new 2-tier Europe may be on the horizon. On average, economic data in the U.S. topped estimates which bodes well for the ongoing economic recovery. The Commerce Department said Retail sales rose +0.5% in October which topped the Street’s estimate for a +0.3% gain. Elsewhere, NY manufacturing data rose +0.61 in November which snapped a 5-month losing streak and also stopped estimates for a reading of negative -2.1. Meanwhile, the Labor Department said, producer prices slid by -0.3% in October which was the first decline in four months and bodes well for inflationary concerns.

Stocks were smacked on Wednesday after Italian Prime Minister designate Mario Monti said he has formed a new government and will serve as the country’s finance minister. Spain’s economy did not grow in Q3 which increases the odds for a recession in the near future. Spain will hold general elections this weekend. In the U.S. the consumer price index (CPI) fell -0.1% in October which was the first decline in four months which eased inflation woes. Elsewhere, U.S. industrial production rose +0.7% in October which topped the Street’s+0.4% estimate and bodes well for the ongoing economic recovery. Finally, the Mortgage Bankers Association said weekly mortgage applications slid last week and erased the previous week’s gain which suggests the housing market continues to suffer.

Thursday & Friday’s Action: 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. Elsewhere, yields on Spanish debt soared which put more pressure on the debt-laden country. 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. Stocks were quiet on Friday as investors digested a busy week.

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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