European’s Kick Dented Can Down The Road- Again

SPX- Strong Rally on Heavy Volume

Friday, June 29, 2012
Stock Market Commentary:

Stocks and a slew of other “risk-on” assets surged on Friday after European leaders announced the latest “solution” to their onerous multi-year debt crisis. In the short-term, this will help investors look past the larger macro concerns that have plagued the market for the past few years and more specifically, for most of the second quarter (e.g. slowing global economy, fiscal and monetary cliff in the US, et al). In early May, all the major averages sliced below their respective 50 DMA lines which prompted us to label this market “in a correction.”  Then in early June the bulls showed up and defend the 200 DMA lines. Then, the major averages rallied sharply to end June nice gains.  Friday’s strong rally on heavy volume will prompt us to change our outlook to market back in a confirmed rally.

Monday-Wednesday’s Action- Tepid Economic Data & All Eyes On Europe:

On Monday, stocks opened sharply lower after a flood of “disconcerting” headlines poured out of Europe. It is now official, Spain formally requested a bailout (EUR100 billion) to recapitalize its banks. The newly appointed finance minister in Greece resigned and Cyprus formally requested aid from the European Union. Economic data from the US topped estimates, new home sales in May hit an annualized rate of 369,000, which is up from April’s un-revised rate of 343,000, and better than the rate of 350,000 that analysts’ had expected. However, this did little to help housing stocks. Since Q4 2011 we have made the case that housing stocks appear to be bottoming which should lead to better “data” from the ailing housing market. That is exactly what we have seen in recent months.

On Tuesday, stocks bounced back as investors digested the latest round of “not horrible” economic and the latest round of European data. The big economic data point was the Case-Shiller 20-city Home Price Index which slid only -1.9%. This topped estimates for a decline of -2.5% and was the latest in a series of stronger-than-expected economic data points from the ailing housing market. Elsewhere, Conference Board’s latest Consumer Confidence Index slid to 62.0 and missed the Street’s forecast for 64. Turning to Europe, German Chancellor Merkel reaffirmed her stance that she does not want Germany to share liability for the periphery countries (e.g. By creating a Euro Bond). Separately, Egan Jones, a small rating agency in the US, downgraded Germany to AA- from A+. They also assigned a Negative Outlook to the rating. Stocks rallied on Wednesday as investors digested a series of stronger-than-expected economic data from the U.S. The Commerce Department said durable goods orders rose by +1.1% in May which topped the Street’s estimate for a gain of 0.4%. The National Association of Realtors said pending homes sales vaulted +5.9% to 101.1,in May which was the highest level in two years and bodes well for the housing market.

Thursday & Friday’s Action- EU Leaders Find “Another” Solution:

Stocks opened sharply lower on Thursday as the latest European summit officially began and investors digested a series of lackluster economic data. Before the bell, the Labor Department said initial jobless claims totaled 386,000 which almost matched estimates. A separate report showed that US GDP rose +1.9% in Q1 2012 which was not a surprise. However, the GDP Deflator was revised higher to reflect a 2.0% increase which topped the Street’s estimate for +1.7%. Stocks staged a strong rally in the final hour of trade after a rumor spread that the European leaders were close to a solution after Germany cancelled a conference call. Finally, Obama’s Health Care Bill was upheld by the Supreme Court which will hopefully help organize this onerous and complex system. Stocks surged on Friday after EU leaders announced plans to help capitalize troubled sovereigns and their banks with a national banking supervisor.

Market Outlook- In a Confirmed Rally

From our point of view, the market is back in a confirmed rally as all the major averages have managed to close above their respective 50 DMA lines. Technically, the 200 DMA line and June’s lows are the next level of support while the 50 DMA line is the next level of resistance for the major averages. As always, keep your losses small and never argue with the tape. 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!

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