Stocks Bounce; Volatility Continues!

Wednesday, November 2, 2011
Stock Market Commentary:

Stocks bounced on Wednesday after fears eased regarding the situation in Europe and the Federal Reserve concluded its latest 2 day meeting. From our point of view, the Greek bailout plan as it currently stands- to use leverage & add more debt to a debt crisis- is foolish at best and does not address the broader issues (i.e. the other PIIGS countries are broke). 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 now negative for the year which is not ideal for 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.

Greek PM Shakes Confidence & ADP Jobs Data Does Not Disappoint:

Risk assets rallied on  Wednesday snapping a severe two day losing streak after fears over Greece eased, the Fed concluded its 2-day meeting, and ADP reported a stronger than expected October jobs report.  Before Wednesday’s open, the ADP said U.S. employers added 110k new private-sector jobs in October which easily topped the Street’s estimate for 101k and bodes well for Friday’s official non-farm payrolls report. Just after 12:30pm EST, the Federal Reserve concluded its 2-day meeting and largely reiterated its recent stance that they will maintain a measured approach as the economy continues to grow, albeit slowly, and inflation remains at bay. The European Central Bank (ECB) and Bank of England will conclude their meeting before Thursday’s open.

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. 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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