Friday, July 22, 2011
Stock Market Commentary:
Stocks ended the week higher after EU leaders announced a new bailout for their debt stricken nations and investors digested a slew of stronger-than-expected economic and earnings data. It was very encouraging to see the Nasdaq 100 break out of its current multi month base and hit new 2011 highs! Technically, it is encouraging to see the major average find support and bounce off their respective 50 DMA lines and positively reverse (open lower and close higher) for the week. Looking forward, the next level of support are the 2011 lows/the 200 DMA lines and the next level of resistance are the 2011 highs.
Monday-Wednesday’s Action: Stocks Bounce off Support!
On Monday, Treasury Secretary Timothy Geithner made it abundantly clear that if the U.S. were to default on its debt, the ramifications would be catastrophic. Over the weekend, U.S. lawmakers failed to reach a deal which caused investors to focus more on the August 2, 2011 deadline. U.S. economic data was light on Monday, home builders’ confidence rose slightly and topped estimates but remains weak from a historical perspective. The recent soft patch in the economy led Goldman Sachs (GS) to lower its forecast for real U.S. economic growth to +1.5% in the second quarter and +2.5% in Q3, down from +2% and +3.25%, respectively. However, all our anecdotal evidence points to a strong summer holiday season across the East Coast of the U.S. and Canada which, barring some unforeseen event, should bode well for Q3 GDP.
On Tuesday, housing starts topped estimates and jumped to the fastest pace in five months. The Commerce Department said work began at an annual rate of 629,000 houses which is up +14.6%from the prior month. This was the latest in a string of stronger-than-expected data from the ailing housing market. Hopefully, better days lie ahead for the ailing housing sector. Elsewhere, several high profiled companies released stronger-than-expected Q2 results which bodes well for the current rally. IBM & Coca-Cola (KO) led the way higher when they reported solid Q2 results. Barring some unforeseen event, we are expecting another solid earnings season.
On Wednesday, the up and down ride continued for the ailing housing market. The National Association of Realtors said existing home sales slid -3.8% in May to an annual rate of 4.81 million. The year-on-year rate tanked to –15.3% from April’s negative -13.8% reading. The closely followed supply gauge rose to 9.3 months from April’s 9.0 months which is not ideal. It was somewhat encouraging to see the median home price rise +3.4% to $166,500. The Mortgage Bankers Association said mortgage applications jumped last week for the largest increase in four months thanks in part to a flurry of refinancing and low interest rates. The IPO market remains encouraging with two high profile company’s topping estimates on Wednesday, Zillow (Z) and Skullcandy (SKUL) both began trading near the top end of their ranges which is encouraging.
Thursday & Friday’s Action: New EU Bailout Plan Lifts Stocks
Before Thursday’s open, the euro rallied smartly after Euro-zone leaders proposed a new aid package for Greece and restructured their closely followed rescue fund. The changes are designed to reduce the debt burdens of Greece, Portugal and Ireland and allow the European Financial Stability Facility (EFSF) to charge rates as low as 3.5%. The plan also extends the average maturity of the loans to 7.5-15 years.
In the U.S., the Labor Department said weekly jobless claims rose 10,000 to 418,000 which topped the Street’s estimate for 410,000. The data showed nearly 1,750 additional job cuts due to the Minnesota government shutdown. Stocks added to gains after Leading economic indicators in the U.S. and the Philly Fed survey rose +0.3. The major averages are on track to hit fresh 2011 highs which is a very healthy sign. The latest round of earnings data topped estimates which is another encouraging sign for the market. Stocks were quiet on Friday as investors digested a slew of mixed earnings data. McDonald’s (MCD) jumped to a new all-time high after smashing estimates but Microsoft (MSFT), Honeywell International (HON), and Caterpillar (CAT) disappointed the Street.
Market Outlook- Confirmed Rally
The last week of June’s strong action suggests the market is back in a confirmed rally. As our longstanding clients/readers know, we like to filter out the noise and focus on what matters most: market action. That said, the recent action suggests the rally is back in a confirmed rally as all the major averages are now flirting with fresh 2011 highs. Until all the major averages violate their respective 50 DMA lines on a closing basis, the market deserves the bullish benefit of the doubt. If you are looking for specific help navigating this market, please contact us for more information.