Middle East Riots Shake Stocks!

Friday, January 28, 2011
Stock Market Commentary:

Stocks ended near their lows for the week after geopolitical woes escalated in the Middle East. Friday’s strong sell off erased the week’s gains, snapped an 8-week winning streak for the Dow Jones Industrial Average (DJIA) and put pressure on the current 22-week rally. The Dow Jones Industrial Average sold off after touching its psychologically important level of 12,000 for the first time since the summer of 2008. The S&P 500 also sold off after clearing its psychological milestone of 1,300. Meanwhile the Nasdaq and the small cap Russell 2000 indexes both lost ground and are currently flirting with their respective 10-week moving average lines. So far, the economic and earnings data out of the U.S. remains positive which has played a pivotal role sending stocks higher this year.

Monday-Wednesday’s Action: Stocks Rally; Commodities Fall

Stocks enjoyed handsome gains on Monday which set a positive tone for the rest of the week. On Tuesday, the latest Case-Shiller home price index fell -0.08% in November which suggests home prices are continuing to bounce along the bottom. Elsewhere, consumer confidence rose in January led by a big improvement in the ailing jobs market. The Conference Board’s index of consumer confidence rose more than 7 points in January to 60.6. After Tuesday’s close, President Obama give his State of the Union address and said, “the state of the union is strong.

On Wednesday, stocks edged higher after the Commerce Department said new home sales rose nearly +18% to a 329,000 annual pace which easily topped the Street’s estimate for a rise to 300,000. The percentage jump was the largest since 1992, and was led by a record +72% increase in the West in December. Elsewhere, the Federal Reserve concluded its first meeting of 2011 and decided to hold rates steady near historic lows and largely reiterated its recent stance and said the economy continues to improve. They also stood by QE 2 which is slated to end in June 2011.

Thursday & Friday’s Action: Economic Data Mixed

Before Thursday’s open, Standard and Poor’s downgraded Japan’s credit rating to AA- from AA, amid growing debt woes. Japan, the world’s third-largest economy in the world after the United States and China, was downgraded by the Japanese government’s already high debt burden was likely to continue to rise and would only peak during the middle of next decade. In the U.S., weekly jobless claims rose by +51,000 to 454,000 last week which easily topped estimates. Heavy snow in the north east was blamed for the uptick in jobless claims. Elsewhere, durable goods fell -2.5% in December largely due to weakness in aircraft orders. After the opening bell, the National Association of Realtors said pending home sales rose 2% to 93.7 for a fifth consecutive monthly gain. Before Friday’s open, the Commerce Department said Q4 GDP rose 3.2% which missed the 3.5% estimate. Stocks fell hard on Friday after riots in Egypt turned violent and the government took drastic measures to contain the crowd. In a negative divergence, a slew of commodities (oil, gold, silver, etc) continued their month long shellacking which could weigh on stocks in the near future.

Market Action- Market In Confirmed Rally; Week 22 Ends

It was encouraging to see the bulls show up and defend the major averages’ respective 50 DMA lines as this market proves resilient and simply refuses to go down. 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. If you are looking for specific high ranked ideas, please contact us for more information.

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