Friday, January 29, 2010
Stocks ended the day, week, month and year lower as investors digested the latest round of tepid economic and earnings data. Volume totals have turned bearish in recent weeks as large institutions continue dumping stocks. Decliners continue to lead advancers as the correction intensifies.
Timing The Correction:
On Friday, January 22, US stocks ended their 46 week rally and entered a correction when all the major averages plunged below their respective 50-day moving average (DMA) lines. Since the March 2009 low, none of the major averages fell more than-10% from their post recovery highs which reiterates how strong this market actually is. However, now that the market is in a correction and the Nasdaq is down just under -8% from its recent high; it will be very interesting to see if the bulls show up and quell the bearish pressure or the selling intensifies. It is important to note that even other developed markets overseas have performed rather well over the past 10 months. However, the Hang Seng Index, Hong Kong’s stock market, fell -10% from its recent high which could drag the rest of the world lower.
The latest round of corporate earnings continue to top analysts’ estimates but fail to impress Wall Street. In the last full week of January, more than 130 companies in the benchmark S&P 500 reported their Q4 results but stocks sold off. Barring some unforeseen event, earnings will have expanded nearly +70% and snapped a record nine-quarter earnings slump. Longstanding readers of this column know that in addition to analyzing the numbers we pay equal, if not more, attention to how the market reacts to the numbers. So far, the reaction has been lackluster at best.
The latest round of economic data was also a disappointment. On Monday, a weaker than expected existing home sales report was released. The data showed that sales plunged in December even though home prices held steady during the month. Existing home sales skidded a whopping -16.7% for the largest monthly decline in over 40 years! Meanwhile, the annual rate of 5.45 million units fell short of the Street’s estimate for 5.90 million.
Two important economic reports were released on Tuesday: the latest read on consumer confidence and the S&P Case/Shiller home price index. The Conference Board’s confidence index beat estimates and rose to 55.9 largely due to a stronger labor market. This helped offset concerns that China’s efforts to cool their booming economy will adversely affect the global economy and a disappointing report from the ailing housing market. The S&P/Case-Shiller home price index rose for a sixth straight month in 20 major US cities. The index rose +0.2% on a seasonally adjusted basis, but was down -5.3% from November 2008.
Stocks positively reversed on Wednesday after the Federal Reserve held rates steady and raised their outlook for 2010. In the after meeting commentary, the Fed said it believes “economic activity has continued to strengthen” since its last meeting in December. However, the Fed did not repeat its view that the housing market continues to improve. News on the economic front was less than stellar specifically in the ailing housing market. The Commerce Department said new-home sales plunged by -7.6% to an annual pace of 342,000 which is the lowest reading since March 2009! The report showed that for all of 2009, sales skidded -23% to 374,000 which was the lowest reading since records began in 1963. The negative housing data followed a string of weaker than expected reports released earlier this week.
Thursday & Friday:
Stocks reacted poorly to President Barack Obama’s first State of the Union address largely due to his plan to increase taxes on the upper class and his plan to end proprietary trading and hedge-fund investments at large banks. Some highlights from his speech were: “the worst of the storm has passed, we face a deficit of trust, and that he wasn’t interested in punishing banks.” For the past ten days, investors were concerned that Congress would not reconfirm Federal Reserve Chairman Ben S. Bernanke for another term. However, those concerns were allayed four minutes before the closing bell when CNBC reported that Bernanke received enough votes for a second term. The economic data of the day was less than stellar. Durable goods missed estimates and experienced its largest decline in history in 2009! Elsewhere, investors were disconcerted to see that jobless claims fell -8,000 last week to 470,000 (prior week revised -4,000 lower to 478,000). It was somewhat encouraging to see the smoother four week average rise +9,500 to 456,250 for a second straight week but the overall report suggests that the jobs market is still weak.
Market Action- In A Correction:
Stocks ended lower on Friday even after the government said Q4 GDP rose +5.7%. The major averages all closed below their respective 50 DMA lines which is not healthy. Until they all close above their short term averages the technical damage remaining on the charts is a concern. So far, the market’s reaction has been tepid at best to the latest round of economic and earnings data. Remember that the recent series of distribution days coupled with the deleterious action in the major averages suggests large institutions are aggressively selling stocks. Disciplined investors will now wait for a new follow-through day to be produced before resuming any buying efforts. Until then, patience is key.
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