Tuesday, December 6, 2011
Stock Market Commentary:
Risk assets were mixed on Monday as optimism spread regarding the European debt crisis. 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.
S&P Puts Eurozone on Warning, Geithner Lands In Europe, & Stocks Barely Move
On Tuesday, stocks spent most of the day trading between positive and negative territory as investors digested the S&P’s decision to put 15 countries in the Euro-zone on warning for a possible downgrade. U.S. Treasury Secretary Tim Geithner landed in Europe and plans to meet several European leaders ahead of this weekend’s summit in Marseille, France. Over the next few days, Geithner is scheduled to meet ECB President Mario Draghi, German PM Angela Merkel, French President Nicolas Sarkozy, and Italian PM Mario Monti, among others as they attempt to tackle the EU debt crisis. On Thursday, the ECB and BOE (Bank of England) will conclude their final meeting of the year and Draghi’s second official meeting as ECB President after Trichet stepped down earlier this year. Draghi cut rates at this last meeting to help spur growth so we would not be surprised for him to take another “strong measure” to stimulate the debt-laden economy.
Market Outlook- Confirmed Rally
The benchmark S&P 500 (SPX) is now flat for the year while the other major averages are now 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). 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!