Day 15: Stocks Close Below Resistance

Friday, February 26, 2010
Market Commentary:

Stocks closed with modest gains on Friday which marked the 15th day of the current rally attempt. Volume, a critical gauge of institutional demand, was mixed compared to Thursday’s levels; higher on the Nasdaq exchange and lower on the NYSE. Advancers led decliners by a 12-to-17 ratio on the NYSE but trailed by 13-to-14 rato on the Nasdaq exchange. New 52-week highs outnumbered new lows on both exchanges.

Week In Review- Mon-Fri:

Stocks closed slightly lower on Monday after the Mortgage Bankers Association said that the percentage of loans that were in foreclosure or behind at least one payment surged to +15.02% which is the highest since the MBA’s records began in 1972. Many analysts believe that foreclosures will likely stay high for the rest of the year as the economy and the jobs market continue to recover from the worst recession since WWII. Stocks got smacked on Tuesday after consumer confidence unexpectedly plunged and an IFO German business index missed estimates.  The Conference Board’s index of US consumer confidence slid to 46 which was the weakest reading in 10 months and below the lowest forecast in a Bloomberg survey. It is important to note that consumer spending currently makes up approximately +75% of the US economy and the disappointing reading on consumer confidence bodes poorly for the economic recovery.

Wednesday- Stocks Recover From Tuesday’s Pounding

On Wednesday, stocks recovered most of what they lost on Tuesday after Fed Chairman Ben Bernanke spent the day testifying on Capital Hill. Bernanke told Congress that the Fed will eventually need to tighten monetary policy however we are still in the “nascent” stages of the economic rebound which still requires low interest rates for an extended period. This helped allay concerns that the Fed will begin raising rates more aggressively after last week’s surprise discount rate hike. The Fed has left its federal funds rate, the rate banks charge each other for overnight loans, at a record low near zero for more than 14 months as the economy continues to recover.

Thursday & Friday Stocks Close Below Resistance:

Stocks fell sharply on Thursday but a late day rally helped the major averages close near their intra day highs. In the US, stocks opened sharply lower after two disconcerting economic reports missed estimates. At 8:30AM EST, Labor Department said initial jobless claims rose by +22,000 to +496,000 in the week ended Feb. 20 which was the level in three months. In a separate report, the Commerce Department said US durable goods excluding transportation equipment slid by -0.6% in January. This was the largest decline since August and missed the Street’s estimate for a +1% increase. On Friday, investors digested four important economic reports which did little to move the market: a stronger than expected reading on Q4 GDP and Chicago PMI, a neutral reading on consumer confidence and a weaker than expected reading on existing home sales.

Earnings Season: Stocks Lower Since Earnings Began

Barring some unforeseen event, the average company in the S&P 500 is on track to snap a record nine quarter earnings slump as earnings season slows down. It is important to note that even though over +70% of S&P 500 companies have topped the Street’s Q4 estimates, 2010 earnings forecasts have fallen from the beginning of the season. Analysts believe that earnings will grow by +26.3% in 2010 which is down from the +30.6% projected in early January. In addition, the S&P 500 is trading below where it closed when earnings season began in early January.

Market Action- In A Correction:

Looking at the market, Friday marked Day 15 of a new rally attempt which means that as long as the February 5th lows are not breached the window remains open for a new follow-through day (FTD) to emerge. A new follow-through day will confirm the current rally attempt and will be produced when one of the major averages rallies at least +1.7% on higher volume than the prior session as a new batch of leaders break out of fresh bases. However, if the February 5, 2010 lows are breached then the day count will be reset and a steeper correction may unfold. So far, the market’s reaction has been tepid at best to the latest round of economic and earnings data which remains a concern. Remember that the market remains in a correction until a new new follow-through day emerges. Until then, patience is king.

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