Stocks End Week In Red; 50 DMA Line Under Attack!

Friday, April 15, 2011
Stock Market Commentary:

Stocks ended lower this week which put pressure on the current rally as the major averages are fighting to stay above their respective 50 DMA lines. The 28-week rally, which began on the September 1, 2010 follow-through day (FTD), ended on Thursday March 10, 2011 when all the major U.S. averages plunged below their respective 50 DMA lines in heavy trade. However, the correction was short lived when a new rally was confirmed on Thursday March 24, 2011′s healthy action. Since then, the action remains healthy which suggests the bulls are back in control of this market.

Monday-Wednesday’s Action: 50 DMA Line Is Violated

Over the weekend, rumors spread that Libyan dictator Qaddafi accepted a peace treaty that would end the two-month civil war that has crippled the North African country. Goldman Sachs (GS) also released a report that suggested locking in profits in several overbought commodities. Both factors put pressure on a slew of commodities. WTI crude oil hit a 2.5 year high earlier this month when it vaulted above $113/barrel. The last time oil surged that high was in the summer of 2008 which directly preceded the fall of Lehman Brothers and the Great Recession.It is important to remain cognizant of the fact that high energy prices acts as an indirect tax on both consumers and businesses which is a bane for the global recovery. Therefore, it is imperative to closely monitor the sensitive relationship between oil prices and economic growth. In other news, Q1 earnings season has officially begun which will likely dictate the near term action for the major averages. Remember, for an objective view of Q1 earnings, we tend to focus on how the major averages and individual stocks react to the numbers, not just the numbers.

On Tuesday, stocks fell after Alcoa Inc. (AA) reported slightly disappointing Q1 results. On another front, earnings season officially began and investors appear to be “buying the rumor and selling the news.” Stocks rallied over the past few weeks (buy the rumor) in anticipation of Q1 earnings and now that we are here, equities are under modest pressure (sell the news) as companies begin to report their numbers in droves.

Before Wednesday’s opening bell, JPM reported stronger than expected Q1 results which helped the market open higher. However, earnings fell short of the so-called whisper number which dragged shares lower by the end of the day. On the economic front, retail sales rose nicely in March due to higher gasoline prices. As expected, higher energy prices hurt auto sales. However, overall retail sales rose +0.4% in March, following a revised +1.1% gain in February. It should be noted that the March figure fell short of the Street’s estimate for a +0.5%gain. President Obama gave a speech which outlined his plan to tackle the country’s onerous debt levels. Elsewhere, the Fed’s Beige Book was released which showed moderate economic growth in much of the country.

Thursday & Friday’s Action:

Before Thursday’s open, the Labor Department said weekly jobless claims unexpectedly rose +27,000 in the first week of April to 412,000. That was the largest weekly gain in two months and easily topped analysts’ estimates for a reading of 380,000. In other news, the producer price index (PPI) was released which showed mixed results. Overall PPI eased a bit but remained elevated with a +0.7% gain in March. Core prices which excludes food and energy rose by 0.3% which followed a +0.2% gain in February. The largest component that grew last month was surging energy prices. Stocks were quiet on Friday as investors digested the latest round of earnings and economic data. Google (GOOG) and Bank of America (BAC) both got smacked after releasing their Q1 results. On the economic front, China’s GDP surged +9.7% in the first quarter while inflation vaulted +5.4%. The combination of stronger economic growth and uncomfortably high inflation led many to believe that Beijing will continue taking steps to curb their economy which should curtail inflation. In the U.S., consumer prices (CPI) rose +0.5% while core inflation remained at bay. Elsewhere, manufacturing data in the New York area and industrial production remain robust which bodes well for the economic recovery. Finally, consumer sentiment edged higher but remains near six month lows.

Market Action- Rally Under Pressure

The current rally which began with the Thursday, March 24, 2011 FTD is now under pressure as several of the major averages violated, and closed, below their respective 50 DMA lines. Remaining objective, it is bullish to see several leading stocks continue to act well (LULU, BIDU, DECK, PCLN, OPEN, SINA, etc) but the deterioration in the major averages should not be overlooked. If you are looking for specific help navigating this market, please contact us for more information.

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