Late Day Rally Curbs Early Selling As Global Rout Continues

Tuesday, September 6, 2011
Stock Market Commentary:

Stocks were closed in the U.S. on Monday in observance of the Labor Day Holiday. However, overseas, stocks were smacked as a new round of fears spread concerning the ongoing EU debt saga and the health of the global economy. Stocks were smacked on Tuesday as the U.S. markets played catch up and fear spread that the U.S. and global economy would fall into a double dip recession. At this point, the current rally is under pressure evidenced by several distribution days (heavy volume declines) since the latest FTD. It is important to note that even with the latest FTD, the major averages are still trading below several key technical levels which means this rally may fade if the bears show up and quell the bulls’ efforts.

Monday-Tuesday’s Action: Global Jitters Smack Stocks

U.S. stocks were closed on Monday for the the holiday however equity futures were open and fell hard as European markets plunged to fresh 2011 lows in heavy volume. In recent weeks, European markets, specifically Germany’s DAX, tends to lead the U.S. markets (both higher and lower). Therefore, the fact that several European markets are at new 2011 lows bodes poorly for U.S markets. The Institute for Supply Management (ISM) said its service-sector index rose to +53.3% last month from +52.7% in July. This topped the Street’s expectation for +51% and topped the boom/bust level of 50.

Swiss Central Bank Defends Currency:

On Tuesday, European stocks rebounded slightly after the Swiss National Bank set a minimum exchange rate target for its franc at 1.20 per euro and stands ready to buy foreign currencies at unlimited quantities. This move helped stabilize European markets, in the short term, before the seller showed up and sent stocks lower. Even with the move, concerns remain regarding the so-called PIIGS (i.e. Portugal, Ireland, Italy, & Greece). In Italy, general strikes are taking place amid austerity plan discussions and later this week, Greece’s PM is going to give a critical speech regarding the country’s dire economic condition. In the U.S. President Obama is expected to give a speech on Thursday night to address the ailing jobs situation.

Market Outlook- Rally Under Pressure

The major averages confirmed their latest rally attempt on Tuesday, August 23, 2011 which was the 11th day of their latest rally attempt. It is important to note that all major rallies in history began with a FTD however not every FTD leads to a new rally (i.e. several FTDs fail). In addition, it is important to note that the major averages still are under pressure as they are all trading below their longer and shorter term moving averages (50 and 200 DMA lines) and are all still negative year-to-date. Our longstanding clients/readers know, we like to filter out the noise and focus on what matters most: market action. This rally will fail if/when several distribution days emerge or August’s lows are breached. Until then, the bulls deserve the benefit of the doubt. If you are looking for specific help navigating this market, please contact us for more information.