20 Week Rally Continues!

Friday, January 14, 2011
Stock Market Commentary:

The major averages enjoyed another weekly gain and the S&P 500 has rallied in 17 of the past 20 weeks! Heretofore, market internals remain healthy evidenced by broad leadership, favorable volume patterns, a rising advance/decline line, and a healthy number of new highs on both major exchanges.

Monday & Tuesday: Euro Rallies & Earnings Season Begins

The major averages and the USD pulled back on Monday to consolidate last week’s impressive rally. For the most part, the news was quiet. The big headlines came from the latest round of multi-billion dollar mergers and acquisitions but they did little to move the major averages. On Tuesday, Japan said that it will join China and begin buying euro debt to help ease pressure on the troubled euro zone. After Monday’s close, Alcoa (AA) kicked off earnings season when they released their latest quarterly results. A handful of other high ranked stocks (JPM, INTC, LEN, etc.) also reported numbers during the week and primarily topped estimates. From our point of view, we tend to focus on two components: the actual report and how the stock (and the major averages) react to the number. Based on the recent market action, we are most likely going to encounter a very strong earnings season.

Wednesday-Friday’s Action: Spain & Portugal’s Debt Sells & Economic/Earnings Data Is Solid:

On Wednesday, Portugal’s debt auction was stronger than expected which helped allay concerns that the small European country will be the next inline for a bailout. Elsewhere, German GDP also topped estimates which bodes well for the global economic recovery. U.S. economic data was positive, the Labor Department said imports rose+1.1%, largely due to higher energy prices coupled with an improving economy. The report showed that import prices rose +0.3% excluding energy which suggests inflation remains contained. At 2pm EST, the Fed released its Beige book which mainly reiterated the recent consensus of an improving economy.

Bank of England & ECB Hold Rates Steady, Spain’s Debt Sells, & More U.S. Economic Data:

On Thursday, the Bank of England (BOE) & the European Central Bank  (ECB) held rates steady at record lows and reaffirmed their stimulus measures as the global economy continues to recover. The BOE said it is concerned that inflation is above the government’s +3% limit as it sits at a six-month high. Spain’s debt auction went well which helped allay concerns that the 10th largest economy will not need to be bailed out in the near future. In The U.S, the producer price index (PPI)  rose +1.1% from November and topped the +0.8% estimate. Jobless claims rose to their highest level since October. Elsewhere, the U.S. trade deficit unexpectedly contracted in November to the lowest level in 10 months. The decline was due to faster growth in overseas markets coupled with a weak dollar which boosted demand for U.S. goods and services. On Friday, stocks edged higher after the consumer price index, advance retail sales, consumer confidence, and industrial production were all released. Elsewhere, a slew of commodities got smacked even as the USD fell.  U.S. equity markets will be closed on Monday in observance of the MLK holiday.

Market Action- Market In Confirmed Rally Week 20

It was encouraging to see the bulls show up in November and defend the major averages’ respective 50 DMA lines. The market remains in a confirmed rally until those levels are breached. The tech-heavy Nasdaq composite and small-cap Russell 2000 indexes continue to lead evidenced by their shallow correction and strong recovery. However, it is important to note that stocks are a bit extended here and a pullback of some sort (back to the 50 DMA lines) would do wonders to restore the health of this bull market. Put simply, stocks are strong. Trade accordingly. If you are looking for specific high ranked ideas, please contact us for more information.

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