Stocks Consolidate Recent Move Near 50 DMA Line

Thursday, May 13, 2010
Market Commentary:

The major averages traded between positive and negative territory as the major averages encountered resistance near their respective 50 DMA lines. Volume totals were reported lower on the Nasdaq and on the NYSE compared to Wednesday’s totals, continuing the week long trend of inordinately light volume.  New 52-week highs outnumbered new 52-week lows on the NYSE and on the Nasdaq exchange. New leadership is a critical part of any rally effort, and while disciplined investors are awaiting a follow-through-day from at least one of the major averages it is somewhat reassuring to see the new highs list expanding again.

NY Prosecutors Focus On Mortgage Backed Securities:

Financial stocks were under pressure after a report showed a Federal investigation was launched into mortgage related bond deals. New York prosecutors are probing eight major Wall Street firms over whether they misled rating companies about mortgage-backed securities. In recent weeks, rating agencies have suffered tremendous criticism over their role in the financial crisis. It is disconcerting to see the highly influential financial group continue to lag its peers evidenced by the lackluster action in several key names. Most of the major financial firms are trading below both their respective 50 and 200 DMA lines which is not an healthy sign.   

Q1 Earnings Are Solid:

So far, +77% of S&P 500 companies beat analyst profit estimates during the first quarter. This is one of the strongest quarterly results in the past decade and bodes well for the ongoing economic recovery. Remember that in late 2009, the S&P 500 snapped a record nine-quarter losing streak in earnings which illustrated how weak the economy was since 2007. However, the fact that earnings have turned higher bodes well for the current recovery.

Market Action- In A Correction- Day 4 Of A New Rallly Attempt:

Thursday marked Day 4 of the current rally attempt which means that as long as Monday’s lows are not breached the window is now open for a proper follow-through-day (FTD) to emerge. In order for a proper FTD to emerge one would have to see at least one of the major averages rally at least +1.7% on higher volume than the prior session as a new batch of high ranked leaders trigger fresh technical buy signals. Once that occurs, then the current rally attempt will be confirmed and the ideal window for accumulating high-ranked stocks will be open again. However, if Monday’s lows are breached, then the day count will be reset. Trade accordingly.

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