Monday, December 12, 2011
Stock Market Commentary:
Risk assets fell hard on Monday after the much anticipated EU summit failed to make any significant headway which raised concerns that several EU states may be downgraded. From our point of view, the market confirmed its latest rally attempt on Wednesday, November 30, 2011 when all the major averages soared over +4% on monstrous volume in response to the global central banks coordinated efforts to flood the world with liquidity. There have been a few isolated instances in history where a new follow-through day (FTD) emerges on Day 3 which validates Wednesday’s healthy action. It is important to note that every major rally in history began with a FTD but every FTD does not lead to a new major rally. In addition, since 2008 the percentage of failed FTD’s has surged due in part to the massive volatility we have seen in the major averages.
EU Summit Fails To Impress; Germany & France Maybe Downgraded!
On Monday, stocks and a slew of commodities were smacked after the much anticipated EU summit failed to address any of the broader issues plaguing the debt-laden continent. Fear spread that the inability to make significant progress over the weekend my cause the rating agencies to downgraded some of the European states which are currently rated AAA. CNBC.com reported that, “The European Union summit produced an agreement to pursue stricter budget rules for the single currency area and also to have euro zone states and others provide up to 200 billion euros ($267 billion) in bilateral loans to the International Monetary Fund (IMF) to help tackle the crisis.”
Market Outlook- Confirmed Rally
The benchmark S&P 500 (SPX) is back in negative territory for the year after failing to stay above resistance (near its respective 200 DMA line) over the past few weeks. However, the other major averages are positive for the year which bodes well for the risk on trade and suggests we might end this year in the black. For months, we have argued in this commentary that 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). Recently, others are beginning to take notice. However, 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. What we have seen from the October 4, 2011 low was simply an over sold bounce into a logical area of resistance (200 DMA line). Looking forward, this sideways action should continue until either support (1074) or resistance (200 DMA line) is breached. Therefore, we have to expect this sloppy wide-and-loose action to continue until the market closes above its longer term 200 DMA line. 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, feel free to contact us for more information. That’s what we are here for!