Risk Assets Rally on A Slew Of Headlines

Thursday, November 3, 2011
Stock Market Commentary:

Stocks opened higher on Thursday as investors digested a slew of headlines out of Europe. We do not like the latest bailout plan as it currently stands:  add more debt to a debt crisis and do it by using a ton of leverage! Everyone is focused on Greece but even if Greece is magically resolved the broader (and more serious) issues (i.e. the other PIIGS countries are broke) still need to be addressed. However, desperate times call for desperate measures. Our job is to trade on what we see happening, not on what we think will happen. We do this by gathering the facts, interpret how the markets react to the news and trade accordingly, not stand in the way of them.  The benchmark S&P 500 (SPX) and Nasdaq composite are back in positive territory for the year which bodes well for other risk assets. Stocks confirmed their latest rally attempt on Tuesday (10.18.11) day 12 of their rally attempt when the SPX and NYSE composite scored proper follow-through days (FTD).  It is important to note that every major rally in history began with a FTD but not every FTD leads to a new rally and the current rally is under pressure. That said, one can err on the bullish side as long as the major averages remain above their 50 DMA lines.

Italy Holds Emergency Meeting, Greece PM In Hot Water, ECB Cuts Rates, & US Economic Data Mixed:

Risk assets were mixed on Thursday as investors digested a slew of geopolitical and economic data. In Europe, Italy’s PM held an emergency cabinet meeting to tackle their onerous debt levels. Greece’s PM is in hot water- again and the European Central Bank (ECB) cut rates by 25 basis points. Greece’s PM dropped the surprise referendum which rattled markets earlier in the week and may be on the verge of losing power. The new ECB President Mario Draghi cut rates in his first meeting on the job and said Europe might slide into a recession in the near future. Meanwhile, economic data in the U.S. was mixed. The Labor Department said weekly jobless claims slid by 9,000 to a seasonally adjusted 397,000. Elsewhere, productivity in Q3 rose to a +3.1% annual rate which was the largest increase since Q1 of 2010. Unit labor costs slid by -2.4% which fell more than the -0.8% estimate. The ISM service index fell to 52.9 in October which was the lowest level since July and fell short of September’s reading of 53.0.

Market Outlook- Rally Under Pressure:

The current rally is under pressure due to the recent severe sell off that sent the SPX below 1230 and erased half of October’s gains. This means that caution is king until the bulls regain control of this market by trading above the 200 DMA line. In addition, it is important to note that the bulls failed to send the major averages above their respective 200 DMA lines and the neckline of their ominous head-and-shoulders top pattern (1250) in late October. We have to expect this sloppy, wide and loose action to continue until that level is repaired and higher prices follow. Our longstanding clients/readers know, we like to filter out the noise and focus on what matters most: market action. If you are looking for specific help navigating this market, please contact us for more information.

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