Wednesday, December 7, 2011
Stock Market Commentary:
Risk assets were mixed on Wednesday as the world waited to see the results of Thursday’s ECB/BOE meetings and then what will happen this weekend from another much anticipated EU Summit. 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.
Germany & France Divided On How to Resolve EU Debt Crisis, Economic Data Mixed
On Tuesday, stocks spent most of the day trading between positive and negative territory as investors continued to wait for the latest headlines out of Europe. Germany and France are still divided on how to handle the ongoing EU debt crisis. At this point, investors are simply in a wait-and-see approach as they are being guided by the latest headlines out of Europe for direction on how to navigate these volatile markets. Economic data was largely mixed, the Mortgage Bankers Association said weekly mortgage applications rose in the U.S. which bodes well for the ailing housing market as interest rates continued to decline. However, China’s annual rate of export growth slowed last month vs October which is not ideal and suggests China’s once red-hot economy continues to cool.
Market Outlook- Confirmed Rally
The benchmark S&P 500 (SPX) continues to encounter resistance near its respective 200 DMA line as it trades above/below the break-even line for the year (1258). 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). 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!