Wednesday, November 9, 2011
Stock Market Commentary:
The S&P 500 and Nasdaq Composite are back in negative territory for the year after fresh concern spread regarding Italy’s debt woes. 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). We are starting to see these “issues” rise to the fore. 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.
Italy Might Need A Bailout & Greece Gets A New Prime Minister:
Risk assets were smacked on Wednesday after Italian bond yields surged. The underlying concern is contagion, meaning other EU countries may default on their debt. What “caused” the virtual panic was when Italian borrowing costs surged to +7% which was the level that previously forced other euro-zone nations (i.e. Greece & Portugal) out of normal credit markets and led them to seek bailouts from external sources such as the EU and IMF. In other news, Filippos Petsalnikos, speaker of Greece’s Parliament will serve as an interim replacement for outgoing Prime Minister George Papandreou. Technically, the benchmark S&P 500 failed at its 200 DMA line which still serves as formidable resistance.
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, please contact us for more information.