Stocks Rally After Hitting Fresh 2010 Lows

Tuesday, May 25, 2010
Stock Market Commentary:

The major averages closed mixed after geopolitical tensions esclated between North and South Korea. Volume was higher than Monday’s levels which was a welcomed sign. Decliners led advancers by nearly a 2-to-1 ratio on the NYSE and by over a 2-to-1 ratio on the Nasdaq exchange. New 52-week lows trumped new 52-week highs on the Nasdaq exchange and on the NYSE. Leadership dried up on Tuesday as there were 0 high-ranked companies from the CANSLIM.net Leaders List that made a new 52-week high and appeared on the CANSLIM.net BreakOuts Page, lower than the 4 issues that appeared on Friday. It is difficult for the market to mount a sustained rally without a healthy crop of strong leaders.

North Korea Cuts Ties With South Korea:

Overnight, stocks plunged in Asia and Europe after bank borrowing costs jumped and North Korea said it will sever ties with South Korea as political tensions continue to mount. On Monday, the US announced plans to conduct anti-submarine exercises with South Korea after the March 26 torpedoing of a South Korean warship. The US dollar rallied on the news which sent the a slew of dollar denominated assets lower on the news (i.e. stocks and commodities).

Financial Stocks Rally:

In the US, Representative Barney Frank, who will lead congressional talks on the much anticipated financial-regulation bill, said Senate language that would require commercial banks to prevent swap-trading “goes too far.” This helped a slew of financial stocks rally from fresh 2010 lows. Goldman Sachs (GS), Morgan Stanley (MS), Bank of America (BAC), among others, positively reversed (opened lower and closed higher) which was a welcomed sign.

Market Action- In A Correction:

All the major averages sliced below Friday’s lows which effectively ended the current rally attempt and reset the base count. However, the benchmark S&P 500 managed to close higher for the day which marked Day 1 of a new rally attempt for that index.  In addition, the earliest a proper follow-through day (FTD) could occur would be Friday, providing Tuesday’s lows are not breached. However, if at anytime, Tuesday’s lows are breached, then the day count will be reset. What does all of this mean for investors? Simple, the market remains in a steep correction which reiterates the importance of adopting a strong defense stance until a new rally is confirmed. Trade accordingly.

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