Stocks Bounce Off Their Upward Trendline!

Stocks successfully bounced after testing their multi-month upward trendline for the fourth time since October 2011. From our point of view, the major averages confirmed their latest rally attempt on Tuesday 1.3.12 which was Day 9 of their current rally attempt. Since then, stocks have been enjoying a very strong uptrend. However, the benchmark S&P 500 encountered resistance above its 2011 high (~1370) and is currently pulling back to consolidate its recent move. It would be perfectly normal and healthy to see a 5-9% pullback before a new leg higher begins. That would bring the S&P 500 down to 1310-1240. Until then, the bulls remain in control of this market as long as the benchmark S&P 500 stays above its 50 DMA line.

Monday-Wednesday’s Action: Shaky Start To The Week

Before Monday’s open, China lowered its 2012 GDP figures to an 8-year low of 7.5% which sent a slew of risk assets lower across the globe. For the better part of the last decade China’s economy has been one of the strongest in the world, especially after the 2008-2009 financial crisis. Therefore, if China’s economy begins to slow and we get another “shock” to the global economy, the ongoing (and fragile) global recovery could be in real jeopardy. In Europe, retail sales snapped a four month losing streak, topped estimates, and unexpectedly rebounded in January. Sales rose +0.3% from December, after falling by half a percentage point at the end of 2011. Economic data in the U.S. topped estimates. The ISM’s service index rose to 57.3 last month which topped estimates and was above the boom/bust line of 50. The Commerce Department said factory orders slid -1% in January which was the largest decline in over a year but still came in above estimates for a decline of -1.5%. 

Stocks fell sharply on Tuesday as fear spread that the global economic recovery would slow materially. Brazil said its economy will grow by 2.7% in 2012 which was way below estimates. Fear spread that Europe will  officially enter another recession and Greece will default on their debt. On the political front, Super Tuesday finally arrived which did little to unite the already fragmented GOP base. Stocks bounced on Wednesday after ADP, the country’s largest private payrolls processor, said the economy added 216,000 new jobs last month which topped the Street’s estimate for 208,000. A separate report released by the Labor Department showed that unit labor costs rose at an annual rate of +2.8% in Q4 which topped the Street’s estimate for an unchanged reading.

Thursday & Friday’s Action: ECB, BOE, Brazil’s Central Bank Cuts Rates & Greek Deal:

Before Thursday’s open, the European Central Bank (ECB) and Bank of England (BOE) held rates steady and largely reiterated their recent, and cautious, stance regarding the ongoing economic recovery. Elsewhere the vast majority of Greece’s private debt holders agreed to the latest deal to restructure the country’s debt. Meanwhile, Brazil’s central bank slashed rates by 75 basis points to 9.75%, down from 10.50% to help stimulate their slowing economy. Investors were concerned after Brazil said that its economy grew by only +2.7% in 2011 which was way lower than 2010’s +7.5% rate.

In the U.S., jobless claims unexpectedly rose by 8,000 to 362,000 last week. A separate report released by Challenger, Gray & Christmas said that the number of job cuts fell by -3.3% in February which bodes well for the jobs market and the ongoing economic recovery. The Street expects Friday’s jobs report to show that U.S. employers added 210,000 new jobs last month. Before Friday’s open the Labor Department said U.S. employers added 227,000 new jobs last month as the unemployment rate remained unchanged at 8.3%.

Market Outlook- Confirmed Rally