Tuesday, December 13, 2011
Stock Market Commentary:
Risk assets fell on Tuesday after Fed’s last meeting of the year. From our point of view, the market confirmed its latest rally attempt on Wednesday, November 30, 2011 when all the major averages soared over +4% on monstrous volume in response to the global central banks coordinated efforts to flood the world with liquidity. However, since then the major averages have gone virtually no-where which suggests caution is the better part of trading valor at this point. There have been a few isolated instances in history where a new follow-through day (FTD) emerges on Day 3 which validates Wednesday’s healthy action. It is also important to note that every major rally in history began with a FTD but every FTD does not lead to a new major rally. In addition, since 2008 the percentage of failed FTD’s has surged due in part to the massive volatility we have seen in the major averages.
Retail Sales Fall In November & Fed Concerned Over Future Downside Risks From Europe
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.
Global Macro Picture is Bleak:
We find it very disconcerting to see other (leading) risk assets fall to fresh 2011 lows in recent days. China’s Shanghai Composite (normally a leading risk on/off indicator) has fallen below its October low and hit a fresh low for the year. The euro, which is strongly correlated to U.S. stocks and other risk assets took out its October low on Tuesday which is not ideal. Gold, Silver, Copper and a slew of other risk assets are also getting smacked in heavy volume which leads us to believe that a cautious stance is paramount at this stage. As an easy reference point, if the benchmark S&P 500 would simply fall to its Oct low, that would be a 140 point decline to 1074! Sometimes, caution is king.
Market Outlook- Confirmed Rally
The benchmark S&P 500 (SPX) is back in negative territory for the year after failing to stay above resistance (near its respective 200 DMA line) over the past few weeks. However, the other major averages are positive for the year which bodes well for the risk on trade and suggests we might end this year in the black. For months, we have argued in this commentary that from our point of view, the current EU bailout plan- to use leverage & add more debt to a debt crisis- is foolish at best and does not address the broader issues (i.e. the other PIIGS countries are broke). Recently, others are beginning to take notice. However, our job is to trade on what we see happening, not on what we think will happen. We do this by gathering the facts, interpret how the markets react to the news and trade accordingly. 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. Our longstanding clients/readers know, we like to filter out the noise and focus on what matters most: market action. 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!