Stocks Flirt With Resistance

Thursday, December 22, 2011
Stock Market Commentary:

Stocks were quiet on Thursday as investors digested a slew of economic data and Italy’s senate approved their austerity plan. The benchmark S&P 500 index is on track to positively reverse (open lower but close higher) for the week (shown here) which is normally a bullish sign. However, it is important to note that the S&P 500 is still below two important areas of resistance (downward trendline and 200 DMA line). We will get bullish once the S&P 500 breaks above resistance (which interestingly, will help it turn positive for the year!).

Italy Approves Austerity Plan; Investors Digest A Slew of Economic Data

On Thursday, stocks were quiet after Italy’s senate approved its much needed austerity plan and investors digested a slew of economic data. The Labor Department said initial jobless claims totaled 364,000 last week, which is much lower than the Street’s estimate of 380,000 and bodes well for the ailing jobs market. Third quarter GDP was revised down to 1.8% which is lower than the 2.0%posted in Q2. Elsewhere, The University of Michigan said U.S. consumer sentiment topped estimates and rose to 69.9 in December. November leading indicators rose +0.5% which topped the +0.3% expectation. Meanwhile, home prices fell -2.8% which is not ideal for the housing market.

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!