Quiet Action In Last Trading Week of 2010

Friday, December 31, 2010
Stock Market Commentary:

The recent tight trading range continued on the major averages in the final week of 2010. 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’s Action:

The major US averages barely budged on Monday after China’s surprise rate hike over the weekend. Over the weekend, China’s central bank decided to raise rates by +0.25% to 5.8%, which is still lower than the 2007 high of 7.8%. The move was designed to combat rampant inflation and curb their red hot economy. In recent months, China has steadily raised their reserve requirements on banks in an attempt to curb the economy and inflation.  A slew of commodities fell on the news (based on the simple notion that a slower economy will curb demand for commodities).

Before Tuesday’s opening bell, the ICSC-Goldman same-store sales index topped estimates. The index rose +1% and +4.8% on a year-on-year basis. The reading was the strongest since Easter which bodes well for the Q4 holiday shopping season. Elsewhere, the S&P Case-Shiller index of home prices slid -0.8% from October 2009 which was the largest year-over-year decline since December 2009.  The reading fell short of the Street’s estimates which put pressure on the ailing housing recovery. At 10 AM EST, the latest read on consumer confidence topped estimates.

Wednesday-Friday Action:

Stocks edged higher on Wednesday on a very quiet news day. It is important to note that nearly every analyst on Wall Street now believes that stocks will rally in 2011. Normally, this is an ominous sign, considering the crowd is usually wrong. However, the one caveat is that the Federal Reserve is pumping trillions of dollars into the system (i.e. QE I & II) which is something that can not be ignored. From our perspective, we do not like to predict market action, instead we remain objective and interpret what happens in real time. That said, the bulls are clearly in control of this market and until that changes, you know where we stand.

Before Thursday’s open, the Labor Department said weekly jobless claims fell to the lowest level since July 2008 which was a healthy sign for the ailing jobs market. Last week, jobless claims fell by -34,000 to 388,000, lower than the median forecast of 415,000 according to Bloomberg News. After the open, the Chicago PMI topped estimates and rose to 68.6 which bodes well for the ongoing economic recovery.

At 10 AM EST, the National Association of Realtors (NAR) said their pending home sales index topped estimates and rose +3.5% to 92.2 from a downwardly revised 89.1 in October. Pending home sales indicate pending contracts that have yet to be closed. The market barely budged on the news which reiterates our thesis that the major averages are in a tight holding pattern until 2011. Normally, the stock market serves as a great leading indicator and a discounting mechanism for the economy. However, the recent 4-month rally in the major averages suggests the economy will continue to improve in the first half of 2011 and, barring some unforeseen event, the risk of a double dip recession is off the table. Stocks slid on Friday but the major averages still ended the month, quarter, and year in the black.

Market Action- Market In Confirmed Rally Week 18

It is encouraging to see the bulls show up in November and defend the 50 DMA lines for the major averages. 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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