Friday, November 23, 2012
Stock Market Commentary:
The major averages rallied during the shortened holiday week as optimism spread that the Fiscal Cliff will be resolved. Technically, the market is simply bouncing from egregiously oversold levels as the major averages still remain in the middle of their 10-week well defined downtrends. Friday marked Day 5 of a New Rally Attempt which means that the window is now open for this rally attempt to be confirmed with a new follow-through day. All we need to see at least one of the major averages rally at least 1.4% on heavier volume than the prior session. If November’s lows are taken out, then odds favor lower, not higher prices, will follow and the day count will be reset. The path of least resistance is down until the major averages confirm their latest rally attempt and break above resistance and their downward trendlines.
Stocks Bounce From Oversold Levels
Stocks soared on Monday as hope spread that the fiscal cliff will be resolved and the tensions in Europe and the Middle East will ease in the near future. Enthusiasm spread after leaders from both sides of the aisle expressed confidence that a deal would be reached before Christmas and Obama said he is “confident” that leaders would deal with the fiscal issues. European stocks rallied after Eurozone finance ministers gave preliminary approval for Greece to get an additional disbursement of 44B euros in emergency aid by Dec 5, assuming the debt-laden nation meets its remaining conditions for the loan.
In the U.S., the National Association of Realtors said existing home sales jumped by +2.1% in October to a seasonally adjusted rate of 4.79M units. This topped the Street’s estimate for a gain of 4.75M units and bodes well for the ongoing housing recovery. The NAHB/Wells Fargo Housing Market Index, which measures sentiment among home builders, rose for the seventh consecutive month and hit its highest level in November.
Stocks opened lower but closed higher (healthy sign) on Tuesday as stocks digested some of the prior session’s strong gains. Housing starts jumped to an annualized rate of 894,000 units during October which topped the Street’s estimate for 840,00 and continues to trend in higher. Building permits missed estimates and slid to 866k from 890k in October. A slew of housing stocks surged on the news because nearly all the housing data continues to show signs of improvement. After Tuesday’s close, Moody’s, one of the popular rating agencies, cut France’s debt rating one notch from AAA to AA1. Interestingly, the euro shrugged off the downgrade and ended the week higher.
Stocks were relatively flat on Wednesday which was the last full trading day of the week. EZ officials approved the last tranche of aid to Greece which helped the euro edge higher and allowed eurozone officials to kick their debt-laden can further down the road. A cease-fire was called between Isreal and Hamas which helped ease concerns. U.S. economic data was mixed. The Labor Department said weekly jobless claims matched estimates for 410,000 new claims, and were elevated for the second straight week due to distortions from Sandy. The Thomson Reuters/University of Michigan consumer sentiment index missed estimates but still ticked higher to 82.7 compared to October’s reading. Elsewhere, the Conference Board’s Leading Economic Index for edged higher by 0.2% in October which matched estimates. The latest read on U.S. manufacturing topped estimates and grew at its fastest pace in five months which bodes well for the broader economy. Markit’s U.S. “flash” manufacturing PMI rose to 52.4 which also topped the boom/bust level of 50. The stock market was closed on Thursday in observance of Thanksgiving. Stocks closed early on Black Friday as initial projects suggest retail sales were higher than last year.
Market Outlook: Downtrend
From our perspective, the market is in a clear downtrend and has now entered correction territory as the major averages continue to fall. On October 9, we said “the rally was under pressure” and then said the “rally was over” on Oct 19. Since then, stocks have gone straight down and a lot of technical damage has occurred. We will turn more bullish once the major averages confirm a new rally attempt and then trade back above their respective down trendlines and 50 DMA lines. As always, keep your losses small and never argue with the tape.