Stocks End Volatile With Modest Gains

Friday, October 21, 2010
Stock Market Commentary:

Stocks ended a volatile week with modest gains as investors digested a slew of economic and earnings data. Volume patterns remain healthy as the major averages have now finished their 8th week of their ongoing rally. However, it is important to note that there have been an ominous number of distribution days that have emerged in the popular indexes which suggests caution. On average, market internals remain healthy evidenced by an upward sloping Advance/Decline line and the fact that new 52-week highs continue to easily outnumber new 52-week lows on both exchanges.

Monday- Wednesday’s Action: Volatile Trading

Stocks ended higher on Monday as investors digested mild economic data and prepared for a busy week of Q3 results. U.S. industrial production unexpectedly fell -0.2% last month which fell short of the small gain expected on Wall Street. At 10:00 AM EST, US homebuilder confidence rose in October to the highest level in four months which was a welcomed sign for the ailing housing market. The National Association of Home Builders/Wells Fargo confidence index rose to +16 which topped estimates and exceeded the prior month’s reading of 13.  After Monday’s close, International Business Machines (IBM) and Apple Inc. (AAPL) released their Q3 results and fell in after hours trade.

Overnight, China’s central bank unexpectedly raised rates for the first time since 2007. China’s central bank raised rates to “stay ahead of the inflation curve.” The move sent the USD higher and a slew of stocks and commodities lower. Before Tuesday’s open, housing starts unexpectedly rose to a five-month high which was a net positive for the ailing housing market. However, earnings failed to impress investors as a slew of high-profile companies got smacked after releasing their latest quarterly data. Apple Inc. (AAPL), IBM, Bank of America (BAC), VMWare (VMW) were among few stocks that got smacked after releasing their latest quarterly numbers. Goldman Sachs (GS) and Coca Cola Company (KO) opened higher after earnings topped estimates.

Stocks came roaring back on Wednesday and enjoyed a strong boost from the latest round of earnings and renewed speculation that the Federal Reserve will enter another round of quantitative easing (a.k.a. QE 2). Concurrently, the USD fell which helped a slew of dollar denominated assets rally; mainly stocks and commodities rally. At 2:00pm EST, the Fed’s Beige Book was released which was largely priced in to the market. The Beige Book is typically published two weeks before a Federal Open Market Committee (FOMC) meeting.

Thursday & Friday’s Action: Stocks Consolidate Recent Move

Before Thursday’s open, the Labor Department said initial jobless claims fell by –23,000 last week to 452,000. At 10:00 AM EST, the Conference Board’s index of leading indicators rose slightly and matched forecasts. On the earnings front, a slew of high profile companies released their latest quarterly results including but not limited to: McDonald’s Corp. (MCD, Netflix Inc. (NFLX), EBAY Inc., (EBAY), and United Parcel Service (UPS), On average, the numbers topped estimates but the reactions were mixed. On Friday, stocks were confined to a relatively tight trading range as traders awaited this weekend’s G-20 Meeting. So far, Q3 results have topped estimates which is a net positive for the ongoing economic recovery.

Market Action- Confirmed Rally Week 8 Just Ended:

Heretofore, the action since this rally was confirmed on the September 1, 2010 follow-through day (FTD) has been strong but the market action has been wide-and-loose which is not a healthy sign. The S&P 500 sliced below its two month upward trendline (shown above) which is an ominous sign. The next level of support for the major averages is their September highs, then their respective 200-day moving average (DMA) lines while the next level of resistance is their respective April highs. We have enjoyed large gains since the September 1st FTD and for the first time, the tape is getting sloppy.  Trade accordingly.

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