Wednesday, November 16, 2011
Stock Market Commentary:
The S&P 500 and Nasdaq Composite continue trading between positive and negative territory for the year as investors continue to digest the latest headlines out of Europe and the latest economic data from the U.S. 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). Finally, others are starting to take notice of this important question. 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, not stand in the way of them. Stocks confirmed their latest rally attempt on Tuesday (10.18.11) day 12 of their rally attempt when the SPX and NYSE composite scored proper follow-through days (FTD). It is important to note that every major rally in history began with a FTD but not every FTD leads to a new rally and the current rally is under pressure. That said, one can err on the bullish side as long as the major averages remain above their 50 DMA lines.
Super Mario Forms New Gov’t, Spain’s Economy Doesn’t Grow, & Inflation In the U.S. Remains Light:
Stocks barely budged after Italian Prime Minister designate Mario Monti said he has formed a new government and will serve as the country’s finance minister. Monti also said he will lay out a new program for economic reform on Thursday. Now investors are focusing on Spain as the next domino that might fall. Spain’s economy did not grow in Q3 which increases the odds for a recession in the near future. The Spanish Treasury will try to sell between 2 and 3 billion euros in government bonds on Thursday and the country is slated to hold general elections this weekend.
In the U.S. the consumer price index (CPI) fell -0.1% in October which was the first decline in four months which eased inflation woes. Elsewhere, U.S. industrial production rose +0.7% in October which topped the Street’s +0.4% estimate and bodes well for the ongoing economic recovery. Finally, the Mortgage Bankers Association said weekly mortgage applications slid last week and erased the previous week’s gain which suggests the housing market continues to suffer.
Market Outlook- Rally Under Pressure:
The current rally is under pressure due to the recent sell off which sent the SPX below 1230 and erased half of October’s gains. This means that caution is king until the bulls regain control of this market. In addition, it is important to note that the bulls failed to send the major averages above their respective 200 DMA lines and the neckline of their ominous head-and-shoulders top pattern (1250) in late October. 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!