Tough Week on Wall Street


Friday, March 18, 2011
Stock Market Commentary:

Stocks around the world were smacked in the aftermath of Japan’s deadliest earthquake and worst Nuclear scare in  several generations. Japan’s benchmark Nikkei index plunged over -10% this week as the country struggles to contain radiation from its deeply damaged nuclear reactors. The 28-week rally, which began on the September 1, 2010 follow-through day (FTD), ended on Thursday March 10, 2011 when all the major U.S. averages plunged below their respective 50 DMA lines in heavy trade. The current crisis in the Middle East remains in flux which is putting upward pressure on oil and gold and downward pressure on equities. The benchmark S&P 500 was up nearly 100% from its March 2009 low before its latest correction and is still about -19% off its all-time high from October 2007.

Monday-Wednesday’s Action: Earthquake Aftermath, Demand Destruction, and More Unrest In The Middle East:

On Monday, the Bank of Japan (BOJ) said it would disperse a record amount of cash into the financial system and double the size of its asset-purchase plan to spark economic growth and curb the adverse affects of the nation’s worst earthquake on record. The BOJ pumped 15 trillion yen ($183 billion) into money markets on Monday to assure financial stability which did little to calm investor’s woes. Japan’s benchmark index tanked over 6% and credit risk spiked. This ominous action reaffirmed concerns that demand destruction (i.e. slower economic growth) will continue for the near future which hurts all asset classes. Elsewhere, riots spread in Bahrain and the civil war continued in Libya which raised concern of more civil unrest in the Middle East.

On Tuesday, Japan’s benchmark Nikkei index plunged another -10% as the country struggles to contain the effects of Friday’s devastating earthquake and low levels of radiation were found in Tokyo! Additionally, the Nikkei suffered its worst two day decline (-16%) since 1987.  Elsewhere, stock futures in the U.S. cut their losses after NY manufacturing accelerated in March to the fastest rate in nine months. The Federal Reserve Bank of New York’s general economic index jumped to 17.5 from 15.4 last month. This easily topped the Street’s estimate of 16.1.  Finally, the Federal Reserve concluded its latest meeting and decided to hold rates steady near historic lows to spark economic growth.

On Wednesday, Japan’s Nikkei index bounced back 5% or less than 1/3 of its prior two day shellacking. Elsewhere, U.S. economic news was less than stellar which sent U.S. stocks lower at the open. The Commerce Department said U.S. housing starts plunged to their slowest level since April 2009 which is ominous news for the ailing housing market and the ongoing economic recovery. The report also showed that building permits plummeted to a record low. Housing starts tanked –22.5% to a 479,000 annual rate with declines stretching across the entire country. This was also sharply lower than the Street’s forecast for 566,000. A separate report showed inflation increased on the wholesale level. The producer price index (PPI) rose 1.6% in February, easily topping January’s +0.8% increase and the Street’s estimate for an+0.8% gain.

Thursday & Friday’s Action: Stocks Bounce As Japanese and Libyan  Woes Ease:

Japan’s benchmark Nikkei index fell 1.4% on Thursday as the nuclear threat eased. Before Thursday’s open, the government said the consumer price index (CPI) rose modestly in February. Headline CPI rose +0.5%, topping the Street’s estimate and came in slightly higher than January’s reading of +0.4%. Core prices, which exclude food and energy, rose +0.2%which matched January’s reading but topped the 0.1% estimate. A separate report showed that jobless claims fell by -16,000 to 385,000 last week. The four-week average, which smooths out the data, fell 7,000 to 386,250 for its best reading since the bottom in March 2009. After Thursday’s close, the United Nations agreed to a no-fly zone in Libya which caused the Libyan government to back down on Friday. Elsewhere, the G-7 agreed to sell a tremendous amount of yen to help offset its record advance earlier in the week. Stocks rallied on the news.

Market Action- Market In A Correction; 28-Week Rally Ends

All the major averages sliced below their respective 50 DMA lines on Thursday, March 10, 2011 and have fallen hard since then.  Thursday, March 17, 2011 marked day 1 of a new rally attempt which means that the earliest a possible follow-through day (FTD) could emerge would be Tuesday, as long as Thursday’s lows are not breached. However, if Thursday’s lows are breached, then the day count will be reset and odds will favor lower prices, not higher, will follow. It is important to note that the recent ominous action reiterates the importance of raising cash and playing strong defense until a new FTD emerges. If you are looking for specific help navigating this market, please contact us for more information.

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