Relatively Flat Week on Wall Street

Friday, October 1, 2010
Stock Market Commentary:

Stocks ended relatively flat this week as a very powerful September and a strong third quarter came to an end on Thursday. Volume patterns and the market’s internals remain healthy as advancers continue to outnumber decliners and new highs steadily trump new lows on the NYSE and on the Nasdaq exchange.

Monday-Wednesday’s Action: Stocks Pause To Consolidate 4-week Rally:

On Monday, stocks edged lower as investors digested the prior week’s large move. Before Monday’s open, several multi-billion dollar deals were announced: Southwest Airlines (LUV) announced plans to purchase AirTran Holdings Inc. (AAI) for about $1.4 billion, Wal-Mart Stores Inc.(WMT) proposed to buy South African consumer goods distributor Massmart Holdings Ltd. for about $4.25 billion, and Unilever NV announced plans to acquire beauty products manufacturer Alberto Culver Co. (ACV) for $3.7 billion.

On Tuesday, stocks recovered most of Monday’s decline as investors looked past the latest round of lackluster economic data. The S&P Case-Shiller housing price index (HPI) was released which showed a modest uptick in home prices around the country. The news was good, not great. Then the Conference Board’s consumer confidence index slid to 48.5, which was down from August’s reading of 53.2. Despite the negative data, it was encouraging that the bulls showed up and defended support after the benchmark S&P 500 index fell to a 1,132 low. Regular readers of this column know that 1,131 was resistance for most of the summer and has now become near term support.

Stocks fell on Wednesday as protests erupted throughout Europe over the newly announced austerity measures aimed at curbing the region’s onerous debt levels. Protests erupted throughout Europe which brought new worries about the health of the region’s financial system. It was interesting to see the Euro rally, which suggests that investors believe, in the long run, the new austerity measures are a net positive for the region.

Thursday & Friday’s Action- Tight Trading Range Continues (1130-1150):

Before Thursday’s opening bell, the government released two stronger than expected economic reports which helped lift futures. The Commerce Department said the final read on Q2 GDP was +1.7%, higher than the prior estimate of 1.6%. Elsewhere, the Labor Department said initial jobless claims fell -16,000 to 453,000 last week. At 10:00AM EST, the Chicago PMI topped estimates which helped send stocks higher. In Europe, Spain’s credit rating was cut one level from AAA to Aa1. Had this event occurred three months ago, the euro and major equity markets around the world would have been fallen sharply. The somewhat muted decline suggests a currently strong market environment.

Stocks rose on Friday after the latest round of economic data was released. US consumer spending, personal income edged higher which helped offset a lower than expected reading from the ISM manufacturing index. The US dollar fell to a six month low which has helped stocks rally in recent weeks and gold to hit a new record high. 

Market Action- Week 5 Confirmed Rally:

The action since this rally was confirmed on the September 1, 2010 follow-through day (FTD) has been very strong. Looking forward, the window is open for disciplined investors to carefully buy high-ranked stocks, while many pundits are expecting that markets may consolidate following recent gains. It was encouraging to see the bulls show up and defend support (formerly resistance) in recent weeks. The next level of support for the major averages is their respective 200-day moving average (DMA) lines while the next level of resistance is their respective April highs. Trade accordingly.

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