Stocks Marginally Higher After A Rather Busy Week

Friday, December 9, 2011
Stock Market Commentary:

For the week, risk assets were mixed as investors digested a slew of data and headlines from across the globe. 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. 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 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.

Monday-Wednesday Action: Stocks Quiet Ahead of ECB Meeting & EU Summit

On Monday, stocks rallied after French President Nicolas Sarkozy and German Chancellor Angela Merkel completed an agreement on a new plan to help resolve the eurozone debt crisis. Italy’s new government unveiled austerity measures to help curb their onerous debt woes. U.S. Treasury Secretary Tim Geithner spent the week in Europe talking to various heads of state ahead of this weekend’s EU summit. During the week, Geithner met with ECB President Mario Draghi, German PM Angela Merkel, French President Nicolas Sarkozy, and Italian PM Mario Monti, among others as they attempt to tackle the EU debt crisis. On Tuesday, stocks spent most of the day trading between positive and negative territory as investors digested the S&P’s decision to put 15 countries in the eurozone on warning for a possible downgrade.

On Wednesday, stocks spent most of the day trading between positive and negative territory as investors continued to wait for the latest headlines out of Europe. Germany and France are still divided on how to handle the ongoing EU debt crisis. At this point, investors are simply in a wait-and-see approach as they are being guided by the latest headlines out of Europe for direction on how to navigate these volatile markets. Economic data was largely mixed, the Mortgage Bankers Association said weekly mortgage applications rose in the U.S. which bodes well for the ailing housing market as interest rates continued to decline. However, China’s annual rate of export growth slowed last month vs October which is not ideal and suggests China’s once red-hot economy continues to cool.

Thursday-Friday’s Action: ECB Cuts Rates by -0.25%, BOE Holds Rates Steady, Economic Data Mixed

Stocks were smacked on Thursday as investors digested a slew of data. The big news came from the European Central Bank (ECB). In his second meeting as head of the ECB, Mr. Draghi lowered rates by –0.25% which was lower than the Street’s estimate for -0.50%. Draghi also disappointed investors when he said that the ECB will not be buying bonds which basically means that the much hoped for “bazooka” to save Europe was not used and that European leaders will actually have to make serious headway at their summit this weekend. The Bank of England (BOE) was virtually a nonevent. Economic data in the U.S. topped estimates but all eyes remain on Europe as investors continue to look (and hope) for a speedy resolution to their debt woes.  The Labor Department said jobless claims fell -23,000 last week to a seasonally-adjusted381,000.which was the lowest reading in almost 9-months. Elsewhere, the Commerce Department said wholesale inventories increased by +1.6% in October which was the highest gain in 5-months and topped the Street’s forecast for a gain of +0.3%.

Stocks rallied on Friday after 26 of the 27 EU leaders agreed to pursue tighter fiscal integration with stricter budget discipline for the EU. However, Britain said it could not accept the proposed EU treaty amendments which led many to question the health of this new treaty. Economic data was positive, U.S. consumer confidence rose to 67.7 which was the fourth consecutive monthly gain and higher than the Street’s estimate for 65.5. Finally, the Commerce Department said the U.S. trade deficit narrowed in October to $43.5 billion which was the lowest reading in 10 months.

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 sessions. 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!

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