Earnings Miss; Stocks React

Thursday, October 13, 2011
Stock Market Commentary:

Stocks opened lower on Thursday as investors looked past a weaker-than-expected earnings report from JP Morgan (JPM) and softer than expected economic data from China. Thursday marked day 8 of a new rally attempt which means the window remains open for a proper follow-through day (FTD) to emerge. All we need to see is a rally of at least +1.7% on heavier volume than the prior session to confirm a new rally. On a positive note, the major averages are in the process of tracing out a bullish double bottom (W) pattern (shown above). In early October, the S&P 500 briefly entered bear market territory defined by a decline of >20% from its recent high however the bulls quickly showed up and defended that level. Conversely, all the major U.S. averages are negative for the year and are flirting with bear market territory which is not ideal. Several key risk assets (multiple stock markets around the world, Copper, Crude Oil, etc.) officially entered bear market territory over the in recent months which bodes poorly for U.S. stocks and the global economy. Nearly every day since early-August, we told you that the major averages are trading between support and resistance of their 2-month base and until they break above resistance or below support expect this very sloppy trading range will continue. Put simply, after testing support (2011 lows), the market is now bouncing back towards resistance (September’s highs) of its wide-and-loose 2-month base.

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Jobless Claims Steady & Trade Deficit Contracts:

Before Thursday’s open, the Labor Department said weekly jobless claims slid last week by 1,000 to 404,000. This was still above the closely followed 400,000 mark. Elsewhere, the US trade balance fell but the gap with China grew, again. The trade deficit fell in August but the imbalance for the year is still above last year’s level while the trade gap with China hit an all-time high. The Commerce Department said the deficit fell to $45.61 billion in August which was the lowest gap in four months. So far the 2011 deficit is running at an annual rate of $564.3 billion, or +13% higher than 2010’s levels. A higher deficit tends to impede economic growth because that means fewer jobs for U.S. workers.

Market Outlook- In A Correction:

The major U.S. averages are still in a “correction” as they continue to bounce towards resistance of their 2-month base. The latest follow-through day (FTD) which began on August 23, 2011 has officially ended which means we will continue “counting” days before a new rally can be confirmed. In addition, it is important to note that the bulls scored a victory since many of the major averages closed above their downward sloping 50 DMA lines for the first time since late July! The next stop is September’s highs and then their 200 DMA lines. 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, please contact us for more information.

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