Stagflation Woes & Stronger Dollar Send Stocks Lower

Tuesday, December 15, 2009

Market Commentary:

The major averages closed lower as investors digested the latest round of disconcerting economic data. Volume, an important indicator of institutional sponsorship, was reported higher than Monday’s totals on the NYSE and on the Nasdaq exchange which marked a distribution day for the major averages. Decliners led advancers by a 23-to-14 ratio on the NYSE and by about a 17-to-10 ratio on the Nasdaq exchange. There were 42 high-ranked companies from the CANSLIM.net Leaders List that made a new 52-week high and appeared on the CANSLIM.net BreakOuts Page, lower than the total of 51 issues that appeared on the prior session. New 52-week highs substantially outnumbered new 52-week lows on the NYSE and on the Nasdaq exchange.

Stagflation Around The Corner?

Before Tuesday’s opening bell, two tepid economic reports were released which suggested stagflation may be on the horizon (higher inflation coupled with low economic activity). The producer price index (PPI) surged while the Empire State manufacturing index plunged. Surging energy prices played a primary role in sending the headline PPI number higher in November but investors were concerned when core prices (which exclude food and energy) also rose. The headline number jumped +1.8% after increasing by +0.3% in October. Not only was the reading sharply higher than October’s reading but it also smashed the Street’s estimate for a +1% increase and was the first year on year increase in several quarters. Elsewhere, manufacturing in the New York region fell short of analysts’ estimates and barely came in above zero for December. In addition, the 2.55 reading was way below November’s reading of 23.51 and October’s total of 34.57, suggesting lackluster growth. Elsewhere, the U.S. dollar rallied on the news which also put pressure on stocks.

Housing Recovery? Almost.

At 1:00pm EST, the National Association of Home Builders released its housing market index. The index, which rates the overall economy and housing market conditions, fell 1 point in December to 16 which is a very low reading. Respondents are still concerned that credit conditions remain very tight which hinders the buyer’s ability to make new purchases. However, it was encouraging to see a slew of housing stocks (BZH, NVR, HOV, etc.) rally on the news.

Price & Volume Action: Still Healthy.

On Tuesday, each of the major averages pulled back from logical resistance levels as leading stocks were mixed. The Dow Jones Industrial Average and benchmark S&P 500 index closed just below 10,500 and 1,115, their respective resistance levels. The Nasdaq composite closed just above 2200 which has served as an important level of resistance for the tech heavy index in recent months.

At this point, the action remains healthy as long as the major averages remain above their respective 50-day moving average lines. A slew of economic data is slated to be released this week and, as always, it will be very important to see how the market reacts to that news. On Wednesday, the Federal Reserve will conclude its 2-day meeting and announce its decision on interest rates. The consumer price index (CPI) and housing starts are also slated to be released tomorrow.

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