Stocks Digest Massive Gains

SPX up 6% for the week

SPX up 6% for the week

Thursday, December 1, 2011
Stock Market Commentary:

Risk assets ended mixed on Thursday after China ‘s factor sector fell in November for the first time in nearly 3 years and investors digested mixed economic data from the U.S. From our point of view, the market confirmed its latest rally attempt on Wednesday, November 30, 2011 when all the major averages surged 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.

China’s Factory Sector Slows & U.S. Economic Data Is Mixed To Slightly Stronger:

Risk assets were mixed on Thursday as investors digested Wednesday’s monstrous rally. Overnight, China said its factor index slowed for the first time in three years which added concerns to the global economic slowdown. The report came one day after China’s central bank lowered their reserve requirements to help stimulate their already strong, but slowing, economy. In the U.S., the Labor Department said weekly jobless claims rose 6,000 last week to a seasonally adjusted 402,000. This was higher than the closely watched 400k mark and the Street’s estimate of 390,000. November’s official jobs report will be released before Friday’s open. Elsewhere, the Institute for Supply Management (ISM) said its manufacturing index rose to 52.7 in November which was the strongest level since June and topped the 51.5 forecast. However, the employment component of the report slid to 51.8 from 53.5. The Commerce Department said construction spending rose 0.8% in October which topped the average estimate for 0.3%.

Market Outlook- Confirmed Rally

The benchmark S&P 500 (SPX) is still in negative territory for the the year but the other averages have turned positive which 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). Finally, others are starting to take notice of this important question. 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!

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