Stocks Rally on Shortened Holiday Week

Thursday, December 23, 2010
Stock Market Commentary:

The major US averages edged higher on this shortened holiday week capping a fourth consecutive weekly gain for the Dow Jones Industrial Average and benchmark S&P 500, fifth weekly gain for the tech-heavy Nasdaq composite, and sixth consecutive weekly advance for the small-cap Russell 2000 index. It is also very impressive to see that the S&P 500 rally in 14 out of the past 17 days, which is very strong action. All US markets will be closed on Friday in observance of Christmas and will remain open on Friday, December 31 2010 (even though it is NYE). Market internals remain healthy, evidenced by an advancing advance/decline line and an expanding number of stocks reaching new 52-week highs.

Monday & Tuesday’s Action- Stocks Edge Higher As Euro Weakens: Fed Extends Swap Lines

On Monday, Moody’s Investors Service downgraded several Irish lenders and debt securities. This sent the Euro plunging to a fresh record low against the Swiss franc and sent the euro slightly lower against the greenback. It was encouraging to see the benchmark S&P 500 index hit a new two-year high as the tech-heavy Nasdaq composite and small-cap Russell 2000 indices both marked fresh multi year highs.

On Tuesday, stocks drifted higher after the Federal Reserve extended its swap lines with the European Central Bank, and the Central banks of: Japan, Switzerland, Canada, and the U.K to help ease dollar liquidity issues. The latest reading on US retail sales was positive evidenced by the weekly measure of comparable store sales at major retail chains, published by the International Council of Shopping Centers and Goldman Sachs (GS). The ICSC/Goldman Sachs index rose +1.7% during the third shopping week of December. The year-on-year pace also rose more than one percentage point to +4.2%, which was the strongest reading since Q2.

Wednesday & Thursday’s Action- GDP, ECB, Jobs, & Housing Data:

The US government said third quarter GDP rose at a +2.6% annual rate. This topped some estimates for a +2.5% reading but fell short of the median estimate for a +2.8%. The Federal Reserve’s preferred inflation gauge, which excludes food and energy and tied to consumer spending, rose at a modest +0.5% pace for the slowest growth since records began in 1959. Elsewhere, sales of existing homes improved but remain slow. Existing home sales rose +5.6% last month to 4.68 million, which fell short of the Street’s estimates.

The European Central Bank will lend banks +149.5 billion euros ($196.8 billion) for three months to help them meet their liquidity needs over the year-end period. The ECB, which is based in Frankfurt, said 270 banks asked for assistance while which will be loaned at its average benchmark interest rate over the period. Tomorrow, a slew of European banks need to repay 96.9 billion euros in maturing 12-month loans and +38.2 billion euros in three-month loans on the Friday. Stocks ended mixed on a busy news day on Friday. The durables goods report was mixed but core orders may be increasing again. In November, durables orders fell -1.3%, following a revised -3.1% drop in October. The Labor Department said jobless claims fell by 3,000 to 420,000 last week. Elsewhere, consumer confidence held steady last month as new home sales swelled by +5.5% to a 290,000 unit annual rate last month.

Market Action- Market In Confirmed Rally Week 17 Ends

It is encouraging to see the bulls show up in November and defend the 50 DMA lines for the major averages. The market remains in a confirmed rally until those levels are breached. The tech-heavy Nasdaq composite and small-cap Russell 2000 indexes continue to lead evidenced by their shallow correction and strong recovery. However, it is important to note that stocks are a bit extended here and a pullback of some sort (back to the 50 DMA lines) would do wonders to restore the health of this bull market. Put simply, stocks are strong. Trade accordingly. If you are looking for specific high ranked ideas, please contact us for more information.

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