The major averages placed a near term low on Friday, November 16, 2012 (Day 1 of the current rally attempt) after politicians hinted that a deal would get done for the fiscal cliff. If November’s lows (SPX 1343) are taken out, then odds favor lower, not higher prices, will follow and this rally attempt will have failed. Additionally, a new rally will be confirmed when we see at least one of the major averages rally at least 1.4% on heavier volume than the prior session or if one of the major averages jump above their respective 50 DMA lines on heavy volume. Keep in mind that the path of least resistance is down until the major averages confirm their latest rally attempt and break above resistance (50 DMA line) and their downward trendlines. For those of you that are interested, Friday marked Day 15 of a New Rally Attempt which means that the window is now open for this rally attempt to be confirmed with a new follow-through day.
Monday-Wednesday’s Action: Stocks Fail At 50 DMA line
Stocks opened higher on Monday but closed lower after encountering resistance near their respective downtrend lines and their 50 DMA lines. Economic data was mixed and the ongoing Fiscal Cliff drama continued to dampen investor sentiment. The ISM manufacturing index slid to 49.5 in November which was the lowest level in nearly 3 years. Meanwhile, the Commerce Department said constitution spending rose 1.4% to an annual rate of $872.1B in October. House Republican leaders wrote a letter to President Obama to counter his plan to avert the fiscal cliff. The counter offer called for $800 billion in revenues through tax reforms and $600 billion in health savings among other offers. The new offer would save $2.2 trillion. Only time will tell how this plays out. I’m surprised that both sides are taking this long to “figure it out.” The good news is that I’m still hopeful a deal will get done, the only question is how much damage will happen before then.
Stocks fell on Tuesday after the benchmark S&P 500 encountered resistance near its 50 DMA line. Technically, the 50 DMA served as support for most of the summer rally and has now become resistance. Bloomberg TV aired an interview with President Obama which largely echoed his recent stance regarding the ongoing Fiscal Cliff negotiations. The Australian Central Bank cut rates to 3% to help stimulate their economy. Elsewhere, Netflix (NFLX) surged after the company announced a multi-year premium pay-TV deal to stream content from entertainment powerhouse, Disney (DIS).
Stocks edged higher on Wednesday after investors digested the latest round of economic and earnings data. ADP, the country’s largest private payrolls company, said US employers added +118k new jobs last month which missed the Street’s estimate for 125k. The report was lowered due to Sandy. Elsewhere, productivity rose at a +2.9% annual rate last quarter which was the fastest in two years and beat the Street’s estimate of +2.7% and Q2’s reading of +1.9%. Overseas news was mostly positive. China’s new leaders said they will continue to support measures aimed to stimulate their economy. In Europe, Markit’s November purchasing managers’ index for the euro zone rose to 46.5 which was higher than October’s reading of 45.7, which was a 40-month low. The reading was still below the boom/bust level of 50.
Thursday & Friday’s Action: 146k New Jobs and 7.7% Unemployment Rate
Stocks were quiet on Thursday as investors waited for Friday’s non-farm payrolls report. Before Thursday’s open, the European Central Bank (ECB) and the Bank of England (BOE) both held rates steady and remain concerned regarding their economic outlooks. The ECB cut its 2013 economic estimates for the 17-member eurozone economy to negative -0.3% which is lower than their latest forecast in late summer for a gain of +0.5%. ECB president Mario Draghi confirmed that the eurozone’s economy declined by -0.1% in Q3 and has failed to grow in each of the past four quarters. Draghi said he expects growth to return in 2014. In the US, jobless claims fell by 25k to 370k last week which bodes well considering the NE is still recovering from Sandy. Stocks were quiet on Friday as investors digested a healthy jobs report and Boehner blamed the White House for the lack of progress with the ongoing negotiations regarding the fiscal cliff. Surprisingly, US employers added 146k new jobs while the unemployment rate fell to 7.7% in November. This reiterates my bullish intermediate term outlook regarding the US economy and the stock market.
Market Outlook: Downtrend
From our perspective, the market is in a clear downtrend until the major averages break and close above their respective 50 DMA lines. It is encouraging to see that the major averages are down less than 10% from their 2012 highs. On October 9, we said “the rally was under pressure” and then said the “rally was over” on Oct 19. Since then, stocks have gone straight down and a lot of technical damage has occurred. We will turn more bullish once the major averages confirm a new rally attempt and then trade back above their respective down trendlines and 50 DMA lines. As always, keep your losses small and never argue with the tape.