Day 1 Of New Rally Attempt; Stocks Positively Reverse!

Tuesday, October 04, 2011
Stock Market Commentary:

Stocks ended higher on Tuesday after Bernanke testified on Capital Hill and said he is prepared to take further steps to stimulate the economy, if needed. Tuesday marked Day 1 of a new rally attempt which means that as long as Tuesday’s lows are not breached the earliest a proper follow-through day (FTD) could emerge will be Friday. However, if Tuesday’s lows are breached the day count will be reset. The S&P 500 briefly entered bear market territory defined by a decline of >20% from its recent high. All the major U.S. averages are decidedly negative for the year and are flirting with bear market territory which is not ideal. Several key risk assets (multiple stock markets around the world, Copper, Crude Oil, etc.) officially entered bear market territory over the in recent months which bodes poorly for U.S. stocks and the global economy. Nearly every day since mid-August, we told you that the major averages were simply rallying (on light volume) towards resistance (50 DMA line) and unless they broke above resistance, the sideways/range bound action would continue. All the major averages are flirting with support (2011 lows) are until they all break below support, one should expect this sloppy sideways action to continue.

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Factory Orders, Bernanke Fails To Inspire Markets, & Apple Unveils iPhone 5!

The Commerce Department said factory orders slid –0.2% which is not a “healthy” sign for the economy. Ben Bernanke spent part of the day testifying on Capital Hill but failed to inspire markets. The Chairman of the Federal Reserve said he is ready to take more steps to boost growth if the economy continues to weaken. However, it is important to note that the major U.S. averages have given up all their gains since he announced QE 2 in August 2010. This questions the long term effectiveness of the program. It also asks the question of how effective will QE 3 be?  The Price to Earnings (P/E) ratio of the S&P 500 fell to 9.9 2012 projected earnings which is considered “cheap” but a quick look at 2008, suggests markets can get a lot “cheaper” so caution is still advised. In other news, Apple Inc. (AAPL) unveiled their much anticipated iPhone 5 which is scheduled to be released later this month.

Market Outlook- In A Correction:

The major U.S. averages are back in a “correction” as they continue to flirt and in some cases hit fresh 2011 lows. Allow us to be clear: If all the major averages break below their 2011 lows, then we will likely see another leg down. Please, trade accordingly! Several high ranked leaders violated their respective 50 DMA lines in late September which bodes poorly for the bulls and suggests the bears are getting stronger. The latest follow-through day (FTD) which began on August 23, 2011 has officially ended which means we will begin “counting” days before a new rally can be confirmed. In addition, it is important to note that the bears remain in control of this market until the major averages trade above their longer and shorter term moving averages (50 & 200 DMA lines). 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, please contact us for more information.

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 Coming Up This Week:

WEDNESDAY: Weekly mortgage apps, Challenger job-cut report, ADP employment report, IS non-mfg index, oil inventories; Earnings from Costco, Monsanto, Marriott
THURSDAY: BoE announcement, ECB announcement, jobless claims, chain-store sales; Earnings from Constellation Brands
FRIDAY: Non-farm payroll, wholesale trade, consumer credit, Sprint’s 4G plans unveiled

Source: CNBC.com