Stocks Fall on Fresh EU Woes

Thursday, August 25, 2011
Stock Market Commentary:

Stocks suffered a distribution day (heavy volume decline) on Thursday after fresh concern spread from Europe. A heavy volume decline so close to a follow-through day (FTD) puts pressure on this nascent rally. Therefore, the current rally is under pressure until the bulls show up and regain control of this market (a high volume rally). 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.

German Jitters Smack Stocks & Steve Jobs Resigns:

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.

Market Outlook- Rally Under Pressure!

The major averages confirmed their latest rally attempt on Tuesday, August 23, 2011 which was the 11th day of their latest rally attempt. However, since then, they have gone virtually “no where” which puts the current rally under pressure. 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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