Stocks Fall After 2-Week Winning Streak

SPX- 200 DMA Line Is Resistance
SPX- 200 DMA Line Is Resistance

Friday, December 16, 2011
Stock Market Commentary:

For the week, most risk assets ended lower after European leaders failed to make any significant headway in their latest meeting. From our point of view, the market is back in a correction as the latest follow-through day (FTD) failed after the benchmark S&P 500 sliced below its 50 DMA line. This is just another example of how erratic markets have been of late. The global macro picture is deteriorating which is not ideal for U.S. stocks. Remember our mantra: Remain flexible in your approach, always cut your losses, and never argue with the tape.

Monday-Wednesday’s Action: Global Markets Plunge In Heavy Trade

On Monday, stocks and a slew of commodities were smacked after the much anticipated EU summit failed to address any of the broader issues plaguing the debt-laden continent. Fear spread that the inability to make significant progress may cause the rating agencies to downgraded some of the European states which are currently rated AAA. reported that, “The European Union summit produced an agreement to pursue stricter budget rules for the single currency area and also to have euro zone states and others provide up to 200 billion euros ($267 billion) in bilateral loans to the International Monetary Fund (IMF) to help tackle the crisis.

On Tuesday, U.S. stocks opened higher but turned lower after the Fed’s last meeting of 2011. As expected, the Fed held rates steady but expressed concern regarding future economic headwinds out of Europe. Earlier in the day, investors were concerned after German Chancellor Angela Merkel rejected any increases in the bailout fund for other debt-laden European nations. Elsewhere, investors were concerned that U.S. retail sales grew at their slowest pace in five months last month. This cooled earlier expectations for a robust Q4 holiday shopping season. The Commerce Department said retail sales rose a weaker-than-expected +0.2% after gaining +0.6% in October. On Wednesday, U.S. stocks and a slew of other risk assets (gold, copper, oil, etc) plunged as fear spread that the global economy was headed for a double dip recession. Since 2008, the global economy has rebounded but the rebound has stalled (or stopped, depending on your vantage point) in recent months. However, we are starting to see a spate of stronger-than-expected economic data out of the U.S. which is helpful.

Thursday & Friday’s Action: Economic Data Lifts Stocks

On Thursday, stocks opened higher after a slew of stronger than expected economic data was released. Weekly jobless claims fell by 19,000 to 366,000 last week. It was encouraging to see that the total number was substantially lower than the 390,000 expectation. The Empire State Manufacturing Survey jumped to 9.5 in December which is sharply higher than November’s poultry reading of  +0.6. and easily topped the Street’s expectation of +3.0. The producer prices index, which measure wholesale prices around the country, rose by +0.3% last month which is higher than the +0.1% expectation. However, core prices rose 0.1% which matched estimates. Stocks edged higher on Friday after the consumer price index (CPI) was flat in November helped by declining energy prices which offset increases in other areas.

Market Outlook- In A Correction

The benchmark S&P 500 (SPX), Russell 2000, and Nasdaq composite are all back in negative territory for the year which is not ideal. Meanwhile, the Dow Jones Industrial Average is up slightly for the year. We find it very disconcerting to see other (leading) risk assets flirt with fresh 2011 lows in recent weeks/days. China’s Shanghai Composite (normally a leading risk on/off indicator) has fallen below its October low and hit a new 2.5 year low. The euro, which is strongly correlated to U.S. stocks and other risk assets also took out its October low on Tuesday (12/13) which is not ideal. Meanwhile, Gold sliced below its longer term 200 DMA line on on Wednesday (12/14) for the first time since August 2008 (1-month before Lehman failed) and remains below that critical level. Other risk assets such as Oil, Silver, Copper, etc are also under pressure which suggests the global risk off trade is getting stronger.  As an easy reference point, if the benchmark S&P 500 would simply fall to its Oct low, that would be 1074! Sometimes, caution is king.

What we have seen from the October 4, 2011 low was simply an over sold bounce into a logical area of resistance (200 DMA line). Looking forward, this sideways action should continue until either support (1074) or resistance (200 DMA line) is breached. Therefore, we have to expect this sloppy wide-and-loose action to continue until the market closes above its longer term 200 DMA line. If you are looking for specific help navigating this market, feel free to contact us for more information. That’s what we are here for!

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