Day1 Of A New Rally Attempt

Tuesday, August 9, 2011
Stock Market Commentary:

Stocks rallied nicely on Tuesday ahead of the Fed’s much anticipated meeting. This will be the first official Fed meeting since the Standard & Poor’s downgraded the U.S.’ AAA credit rating to AA+ on Friday 8/5/11. Tuesday marked Day 1 of a new rally attempt which means that as long as Tuesday’s lows are not breached, the earliest a possible follow-through day (FTD) can emerge will be Friday. However, if Tuesday’s lows are breached, then all bullish bets are off the table and the day count will be reset. It was also healthy to see stocks positively reverse (close higher) from a new 2011 low. Normally, but not always, reversals (both positive and negative) mean that the near term trend has changed. It is also important to note that some of the stock market’s largest moves (both “up” and “down”) occur during corrections/bear markets. Since we are clearly in the middle of a severe correction as all the major averages and a slew of leading stocks got smacked in heavy volume it is imperative to play defense until a new rally is confirmed. It is also important to be on the look out for very attractive rallies which are also known as “sucker rallies” because they suck you in and then resume another leg lower. To be clear, the bears remain in control of this market until the major averages close above their longer term 200 DMA lines or a new FTD emerges.

Stocks Flirting With Bear Market Territory & QE 2 Gains Are Toast:

The small-cap Russell 2000 index has plunged a whopping -25% over the past few weeks which easily puts that index into “bear market” territory. Traditionally, Wall Street defines bear markets when any market declines by >-20% from a recent high. The S&P 500 and Dow Jones Industrial average fell as much as -17% and -15% respectively over the past few weeks, which is not “healthy” action. Meanwhile, the tech-heavy Nasdaq composite fell -18% for Tuesday’s bounce. It is also worrisome to see that all the gains (nearly 10 months) of QE 2 have disappeared in only two weeks! The two areas of strength remain bonds and gold. Gold has surged to a fresh record high of $1782/ounce and the VIX (volatility index) surged over +50% this week and remains at disturbingly high levels. This, ladies and gentlemen, is not healthy action. Trade wisely.

Inflation Jumps In China, U.S. Productivity Falls in the U.S., & Bernanke Holds Rates Steady:

On Tuesday China said its CPI topped estimates and rose +6.5% last month which added pressure for the central bank to curb their red-hot economy without derailing the already fragile global recovery. In the U.S., the Labor Department said U.S. productivity slid in the second quarter while labor costs rose amid a painfully slow economic recovery. The report showed that non-farm business productivity fell at a -0.3% annual rate last quarter after falling -0.6% in the first three months of 2011. Similar to Q1 GDP, Q1 productivity was revised down sharply from an originally reported +1.8% rise which is not ideal. As expected, the Federal Reserve decided to hold rates steady for at least the middle of 2013 (2 yrs from today) and left the door open for further action, if conditions continue to deteriorate. In their post meeting commentary, the FOMC made it abundantly clear that the economy will remain weak for the next two years which bodes poorly for the ongoing and fragile economic recovery.

Technical Action Remains Weak:

Technically, the action in major equity markets across the globe is downright awful and suggests we are heading lower, not higher. However, that could change if/when any of the structural issues which caused this mess are actually addressed (i.e. onerous debt levels, profligate spending, etc.). In the short term, the major averages are extremely “oversold” and one should expect a “bounce” of some sort to occur in the near future which will help alleviate that condition and send them back towards their respective 200 DMA lines. With that said, it is imperative to note that markets can very easily get “more oversold” very easily.

Market Outlook- Market In A Correction

The latest action in the major averages suggests the market is back in a correction as all the major averages remain below key technical levels. Our longstanding clients/readers know, we like to filter out the noise and focus on what matters most: market action. That said, the recent action suggests caution is paramount at this stage until all the major averages rally back towards their respective 200 DMA lines. If you are looking for specific help navigating this market, please contact us for more information.

 

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