Stocks Snap Monster 4-Week Rally

Friday, November 4, 2011
Stock Market Commentary:

Stocks snapped a monstrous 4-week rally which sent the major averages soaring nearly 20% off their 2011 lows! From our point of view, the current EU bailout plan- to use leverage & add more debt to a debt crisis- is foolish at best and does not address the broader issues (i.e. the other PIIGS countries are broke). However, desperate times call for desperate measures and we understand the underlying dynamics at play. Our job is to trade on what we see happening, not on what we think will happen. We do this by gathering the facts, interpret how the markets react to the news and trade accordingly, not stand in the way of them.  The benchmark S&P 500 (SPX) and Nasdaq composite are now negative for the year which is not ideal for risk assets. Stocks confirmed their latest rally attempt on Tuesday (10.18.11) day 12 of their rally attempt when the SPX and NYSE composite scored proper follow-through days (FTD).  It is important to note that every major rally in history began with a FTD but not every FTD leads to a new rally and the current rally is under pressure. That said, one can err on the bullish side as long as the major averages remain above their 50 DMA lines.

Monday-Wednesday’s Action: Greek PM Shakes Confidence:

Risk assets fell on Monday after the Bank of Japan intervened in the currency market to curb their red-hot yen ahead of the G-20 meeting. October 2011 will go down in history as the best month for the DJIA since 2002 and the best month for the benchmark SPX since 1991! From the 10/4 low-10/31′s close: SPX jumped +16.6%, NDX +15.5%, DJIA +15%, & R2K (RUT) vaulted +23.15%! Risk assets fell on Tuesday after the Greek PM asked for a referendum to support the latest bailout plan and the latest manufacturing data was lackluster in China and the U.S. The Institute for Supply Management (ISM) said its manufacturing index fell to 50.8 from 51.6 in the prior month but missed expectations of 52.0, according to a Reuters poll. The latest mfg data from China was also less than thrilling.

Risk assets rallied on  Wednesday snapping a severe two day losing streak after fears over Greece eased, the Fed concluded its 2-day meeting, and ADP reported a stronger than expected October jobs report.  Before Wednesday’s open, the ADP said U.S. employers added 110k new private-sector jobs in October which easily topped the Street’s estimate for 101k and bodes well for Friday’s official non-farm payrolls report. Just after 12:30pm EST, the Federal Reserve concluded its 2-day meeting and largely reiterated its recent stance that they will maintain a measured approach as the economy continues to grow, albeit slowly, and inflation remains at bay.

Thursday & Friday’s Action: Stocks Rally As Greek Drama Subsides:

Risk assets were mixed on Thursday as investors digested a slew of geopolitical and economic data. In Europe, Italy’s PM held an emergency cabinet meeting to tackle their onerous debt levels. Greece’s PM is in hot water- again and the European Central Bank (ECB) cut rates by 25 basis points. Greece’s PM dropped the surprise referendum which rattled markets earlier in the week and may be on the verge of losing power. The new ECB President Mario Draghi cut rates in his first meeting on the job and said Europe might slide into a recession in the near future. Meanwhile, economic data in the U.S. was mixed. The Labor Department said weekly jobless claims slid by 9,000 to a seasonally adjusted 397,000. Elsewhere, productivity in Q3 rose to a +3.1% annual rate which was the largest increase since Q1 of 2010. Unit labor costs slid by -2.4% which fell more than the -0.8% estimate. The ISM service index fell to 52.9 in October which was the lowest level since July and fell short of September’s reading of 53.0. Before Friday’s open, the Labor Department said U.S. employers added 80k new jobs in October which fell short of the Street’s 90k estimate. However, it was encouraging to see August and September’s readings revised upward and the unemployment rate tick lower to +9.0%, from +9.1% in September.

Market Outlook- Rally Under Pressure:

The current rally is under pressure due to the recent severe sell off that sent the SPX below 1230 and erased half of October’s gains. This means that caution is king until the bulls regain control of this market. In addition, it is important to note that the bulls failed to send the major averages above their respective 200 DMA lines and the neckline of their ominous head-and-shoulders top pattern (1250) in late October. We have to expect this sloppy, wide and loose action to continue until that level is repaired and higher prices follow. Our longstanding clients/readers know, we like to filter out the noise and focus on what matters most: market action. If you are looking for specific help navigating this market, please contact us for more information.

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