Stocks & Euro Negatively Reverse


Wednesday, May, 26, 2010
Stock Market Commentary:

The major averages and the euro negatively reversed (opened higher but closed lower) after Italy announced that it will restructure $30 billion in debt and Germany’s bond auction was less than stellar. Volume was higher compared to Tuesday’s totals on both major exchanges while advancers led decliners by a 23-to-15 ratio on the Nasdaq exchange and a 15-to-11 ratio on the NYSE. There were 8 high-ranked companies from the Leaders List that made a new 52-week high and appeared on the BreakOuts Page, higher than the 0 issues that appeared on Monday. It is difficult for the market to mount a sustained rally without a healthy crop of strong leaders. New 52-week highs outnumbered new 52-week lows on the NYSE and trailed on the Nasdaq exchange.

Italy Cuts Budget By $30.4 Billion:

The major averages opened higher after a healthy rebound from a fresh 2010 low on Tuesday. However, the bears quickly showed up and sent the market lower which reiterates the importance of waiting for a proper follow-through day (FTD) to emerge before buying stocks. Italy’s Prime Minister, Silvio Berlusconi, said the country planned 24.9 billion euros ($30.4 billion) of budget cuts over the next two years. Berlusconi said the budget cuts are “absolutely necessary” and are strictly aimed at defending the euro. The measures are part of a broad push by several European nations aimed at taming budget deficits to protect the euro. So far, the euro has plunged -15% this year and is currently testing its 2008 and 2009 low.

Healthy Economic Data Does Little To Help Stocks:

The economic news released on Wednesday was healthy as new home sales and durable goods both jumped to multi year highs. New home sales rose +15% to an annual pace of +504,000 last month. This was the highest reading in two years which bodes well for the ailing housing market. The report showed that the median price of a new home fell to $198,400 which was the lowest level since December 2003. It was interesting to see that the vast majority of new sales occurred in houses costing less than $300,000 which reflects demand from first-time buyers due to the now expired tax credit. Elsewhere, the Commerce Department said durable goods orders jumped +2.9% which was the highest reading in three years.

Market Action- In A Correction:

Wednesday marked Day 2 of a new rally attempt for the benchmark S&P 500 index but the other major averages have yet to mark Day 1 which is a negative divergence. That said, as long Tuesday’s lows are not breached in the S&P 500, the earliest a proper follow-through day (FTD) could occur would be Friday. However, if at anytime, Tuesday’s lows are breached, then the day count will be reset. What does all of this mean for investors? Simple, the market remains in a correction which reiterates the importance of adopting a strong defense stance until a new rally is confirmed. Trade accordingly.


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