Worst Quarter Since 2008!


Friday, September 30, 2011
Stock Market Commentary:

The third quarter of 2011 was the worst quarter for risk assets since 2008! Several key risk assets (multiple stock markets around the world, Copper, Crude Oil, etc.) officially entered bear market territory (marked by a decline of >20% from a recent high) in Q3 2011 which bodes poorly for U.S. stocks and the global economy. Nearly every day since mid-August, we told you that the major averages were simply rallying (on light volume) towards resistance (50 DMA line) and unless they broke above resistance, the sideways/range bound action would continue. Now, the major averages are simply trading near support (SPX 1101-1123) of their two month base and unless support is violated then, by definition, we should expect this sideways action to continue.

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Monday-Wednesday’s Action: Stocks Bounce Off Support

Stocks rallied on Monday as optimism spread that European leaders will unite and save Greece from defaulting on its debt. Gold was smacked and sliced below the pscyhologically important 1600 level for the first time in over a month as the bears remain in control of this market in the short term. In the U.S., new home sales remain on life support and at a nine-month low, at a 295,000 annual rate in August vs 302,000 in July and 303,000 in June. The report also showed that prices tanked -8.7% in August for both the median ($209,100) and the average ($246,000) new home around the country. This is just the latest in a series of weaker than expected data points for the ailing home sector.

On Tuesday, German Chancellor Angela Merkel and Greek Prime Minister George Papandreou met to discuss the ongoing debt problem. Papandreou said he can “guarantee” that Greece will deliver on all of its austerity pledges which sounds greet on paper but we have yet to hear a “CEO or Head of State” speak honestly about “the worst case scenario.” In the U.S., the economic data was less than stellar. The S&P  Case-Shiller index, which measures home prices around the country, gained for a fourth consecutive month to +0.9% in July amid peak buying season. The report easily topped the Street’s estimate for a decline of -4.5%, according to a Reuters. However, the Conference Board said consumer confidence plunged to 45.4 in September which missed the Street’s estimate for 46.0.

On Wednesday investors continued to read every headline out of Europe for clues on how EU leaders will handle the situation in Greece. Finland’s parliament voted to increase the size of the European Union’s debt bailout fund. The move increases the odds for a second Greece bailout and expands the European Financial Stability Facility (EFSF), set up after the Greek May 2010 debt crisis, effective lending capacity to 440 billion euros ($624 billion). In the U.S., durable goods order slid in August by -0.1%, following July’s healthy reading of +4.1%.

Thursday & Friday’s Action- Stocks Fade as Q3 Winds Down:

Before Thursday’s open, Germany’s Parliament approved a plan to expand the euro-zone’s bailout fund. This helped allay concerns of an imminent Greek default. In the U.S., two stronger-than-expected economic data points were released: jobless claims and Q2 GDP.  The Labor Department said, weekly jobless claims slid by -37,000 to 391,000 last week which was below the psychologically important 400,000 mark for the first time in months. This easily exceeded the Street’s estimate for a decline of -3,000. Elsewhere, the government said final Q2 GDP rose +1.3%, which topped estimates of +1.2%. Finally, pending home sales slid -1.2% to 88.6 which was better than the -2% decline expected on Wall Street. Stocks were smacked on Friday as Q3 2011 came to an end. It was the worst quarter for risk assets since 2008. The benchmark S&P 500 shed 189 points or a whopping -14.3% last quarter.

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, this sloppy and sideways action will likely continue. If you are looking for specific help navigating this market, please contact us for more information.

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