Stocks Fall As Economy Weakens

Friday, August 20, 2010
Stock Market Commentary:

For the week, the Dow Jones Industrial Average and the benchmark S&P 500 index fell, the Nasdaq composite ended with a modest gain, as investors digested a flurry of M&A activity and the latest round of lackluster economic data. Volume totals on Friday fell compared to Thursday’s levels as the major averages ended mixed. Decliners led advancers by a 23-to-15 ratio on the NYSE and by a small margin on the Nasdaq exchange. New 52-week highs outnumbered new 52-week lows on the NYSE but trailed new lows on the Nasdaq exchange. There were only 9 high-ranked companies from the Leaders List made a new 52-week high and appeared on the BreakOuts Page, lower than the 10 issues that appeared on the prior session.

Monday-Wednesday’s Action- Stocks Move Sideays As M&A Activity Increases:

Stocks traded in a tight range on Monday as investors digested weaker than expected economic data from Japan and the US. Japan said its economy slowed sharply last quarter with GDP missing forecasts. Japan’s economy grew by +0.4% on an annualized basis which was less than the Street’s estimate. Stocks slid after a weaker-than-expected report from New York manufacturing was released. The major averages rallied on Tuesday as the latest round of earnings topped estimates and a flurry of mergers and acquisitions (M&A) were announced. The “big” news came when an Australian firm made an unsolicited takeover bid of $39 billion for Potash Corp. of Saskatchewan Inc. (POT +0.56%). Potash Corp., the world’s largest fertilizer producer, rejected the unsolicited bid from BHP Billiton Ltd. (BHP +0.13%) as too low, but the news helped lift other fertilizer firms’ shares. 

The major averages ended slightly higher on Wednesday as investors looked past lackluster earnings and retail sales. The major averages opened lower after retail sales and the latest round of corporate earnings failed to impress analysts’ lofty expectations. However, stocks rallied after speculation spread that the M&A market will heat up which is a net positive for equities and the economy. In other news, General Motors filed for its initial public offering (IPO) under the ticker symbol: GM.

Thursday & Friday’s Action: Stocks Tank On Tepid Economic Data:

Stocks got smacked on Thursday as investors digested a series of dismal economic data: initial jobless claims unexpectedly rose, while both leading economic indicators and the Philly Fed’s general economic index fell. The Labor Department said that applications for unemployment benefits in the US jumped to the highest level since November 2009 last week which indicated that more employers are slashing jobs as the economy slows. Initial jobless claims rose by 12,000 to 500,000 in the week ended Aug. 14 and topped the Street’s estimate of 478,000. Meanwhile, the Philadelphia Federal Reserve’s general economic index fell to -7.7 which was below analysts’ estimates and led many to question the health of the economic recovery. In other news, Intel (INTC +0.05%) announced plans to buy McAfee (MFE +0.04%) for $7.68 billion. So far, global M&A business has topped $1.22 trillion in 2010 which is +17% higher than the same time last year, according to Bloomberg. The increase in M&A business bodes well for the ongoing economic recovery. Stocks ended mixed on Friday, rebounding from a very weak open.

Market Action- Rally Under Pressure:

The technical action in the major averages continues to weaken. Currently, resistance for the Dow Jones Industrial Average and the benchmark S&P 500 index is their respective 200 DMA lines, while the Nasdaq Composite faces resistance at its 50 DMA line. It is also disconcerting to see the action in several leading stocks remain questionable as evidenced by the dearth of high-ranked leaders breaking out of sound bases. Thursday’s action wiped out the gains enjoyed earlier in the week for the major averages which emphasizes the importance of remaining cautious until the rally is back in a confirmed uptrend. Put simply, we can expect this sideways/choppy action to continue until the market breaks out above resistance or below support (recent chart lows). The first scenario will have bullish ramifications while the second will be clearly bearish. Trade accordingly.

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