Stocks Confirm New Rally Attempt

Friday, August 26, 2011
Stock Market Commentary:

Stocks ended higher this week, snapping a 4-week losing streak and confirmed their latest rally attempt on Tuesday when a proper follow-through day  (FTD) emerged. From our point of view, the market is simply pausing to consolidate its recent shellacking (15-18% from late July to early August). The major averages are technically in a new confirmed rally which means probing the long side may be prudent, if/when high ranked stocks begin to trigger fresh technical buy signals. Even with the latest FTD, the major averages are still trading below several key technical levels which means this rally may fade if the bears show up and quell the bulls’ efforts.

Monday-Wednesday’s Action: New Rally Attempt

Over the weekend, Libyan rebels made significant progress in their ongoing attempt to over throw Qaddafi’s oppressive 42-year regime. Stocks confirmed their latest rally attempt on Tuesday when the tech-heavy Nasdaq composite surged +4.29% on heavier volume than Monday’s session. Before Tuesday’s open, Germany’s ZEW Economic Sentiment Survey tumbled to -37.6 in August from -15.1 in July. In France, the country’s preliminary Manufacturing PMI slid to 49.3 in August from 50.5 in July. The broader Eurozone data also failed to impress. The Eurozone Manufacturing PMI fell to 49.7 in August from 50.4 in the prior month. The Eurozone ZEW Economic Sentiment reading plunged to -40.0 from -7.0 in July. In the U.S., new home sales fell to a five month low and missed estimates. The Commerce Department said new home sales slid -0.7% to a seasonally adjusted 298,000-unit annual rate which was the lowest reading since February. June’s pace was revised down to 300,000 units from the previously reported 312,000 units. The one glimmer of hope was that supply, a critical component to determining market price, fell sharply. Despite the weaker than expected economic data from Europe and the U.S., it was interesting to see stocks rally as hope spread that Bernanke’s Jackson Hole speech on Friday will have the same effect as it did last year on risk assets.

On Wednesday, Moody’s cut Japan’s credit rating one step to Aa3, with a stable outlook as the nation continues to work its way out of the horrible earthquake back in March. In the U.S., the Commerce Department said durable goods jumped +4% last month which easily topped the average estimate of +2%.

Thursday & Friday’s Action: Stock Rally After Bernanke’s Speech

Stocks opened higher on Thursday but quickly turned lower after rumors spread that Germany’s credit rating may be cut. The rumors were put to bed after CNBC said S&P, Moody’s Investors Service, and Fitch Ratings affirmed their AAA ratings. In the U.S., the Labor Department said weekly jobless claims rose to +417k last week which easily topped the 405k expectation and bodes poorly for the ailing jobs market. In other news, Apple’s legendary CEO, Steve Jobs, resigned as CEO (but will remain Chairman) and Tim Cook, his long-time #2, took over as CEO.

Buffett Takes Major Stake in BAC

The other major headline on Thursday was that Warren Buffett would invest $5 billion in Bank of America (BAC). An CNBC.com reported, “Bank of America will sell Berkshire 50,000 shares of cumulative perpetual preferred stock with a 6 percent annual dividend, it said in a statement Thursday. Bank of America can buy back the investment at any time by paying Buffett a 5 percent premium. Berkshire also will get warrants to buy 700 million Bank of America shares at an exercise price of just over $7.14 a share, with the ability to exercise any time in the next 10 years.” There is a lot of confusion as what the deal means. From our point of view, Buffett will collect a major premium the entire time he holds the warrants. If/when BAC is in a position to buy them back he will get an additional 5% over his annual 6% dividend. However, if BAC’s shares go to ZERO he losses $5billion.

Bernanke Reaffirms Outlook
Before Friday’s open, the government lowered their reading on Q2 GDP from 1.3% to 1%. Despite a quick sell off stocks bounced after Ben Bernanke reaffirmed his current stance and did not announce QE 3.

Market Outlook- Confirmed Rally!

The major averages confirmed their latest rally attempt on Tuesday, August 23, 2011 which was the 11th day of their latest rally attempt. It is important to note that all major rallies in history began with a FTD however not every FTD leads to a new rally (i.e. several FTDs fail). In addition, it is important to note that the major averages still are under pressure as they are all trading below their longer and shorter term moving averages (50 and 200 DMA lines) and are all still negative year-to-date. Our longstanding clients/readers know, we like to filter out the noise and focus on what matters most: market action. This rally will fail if/when August’s lows are breached. Until then, the bulls deserve the benefit of the doubt. If you are looking for specific help navigating this market, please contact us for more information.

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