Friday, January 13, 2012
Stock Market Commentary:
Stocks and a slew of other risk assets ended the week higher shrugging off France’s downgrade (which made lose its AAA rating) and investors digested a slew economic and earnings data. From our point of view, the major averages confirmed their latest rally attempt on Tuesday 1.3.12 which was Day 9 of their current rally attempt. It was also encouraging to see the S&P 500 break above its downward trendline and its longer term 200 DMA line (shown above). Looking forward, the next area of resistance remains Q4’s highs (~1292) and then 2011 highs near 1370. In addition, the bulls remain in control as long as the benchmark S&P 500 trades above its 200 DMA line.
Monday-Wednesday: Stocks Rally Ahead of EU Meeting
Stocks were relatively quiet on Monday as EU leaders met to discuss their debt problems and Alcoa officially kicked off Q4 earnings season. In Europe, French President Sarkozy and Germany’s PM Merkel met and said they want to complete their negotiations on a new treaty in the coming days so it could be signed by March 1, 2012. Meanwhile, Germany sold 3.9 billion euros ($4.9 billion) in six-month T-Bills with a negative yield for the first time in modern history. After the bell, Alcoa kicked off earnings season when they released their Q4 results. As always, it is very important to focus on how stocks react to earnings and not just the earnings. There have been many examples were the numbers are horrid but the stock gaps up and charges higher for the next few quarters and the converse is also true.
Stocks opened higher on Tuesday as Q4 earnings season kicked into gear. We also tell our clients that price is primary and everything else (even earnings) is secondary. Investors were also happy to see that for the second consecutive month, small-business optimism rose in the U.S. The National Federation of Independent Business Optimism Index rose to 93.8 in December which is 1.8 points higher than November’s reading and 5.7 points higher than September 2011. Elsewhere, wholesale inventories corrected in November to 0.1% which was down from October’s reading of +1.2%.
Stocks were mixed on Wednesday as the world awaited Thursday’s ECB meeting. In the U.S., a handful of companies released their Q4 results which largely met estimates. At 2pm EST, the Federal Reserve released its Beige Book which measures the economy at each branch in its 12 districts around the country. The Beige Book is released roughly two weeks before the next FOMC meeting and is used to gauge the overall health of the economy. The report showed that the U.S. economy grew albeit at a slower pace than Fed officials would like to see.
Thursday- Friday’s Action: ECB & BOE Meet, U.S. Economic Data Fails To Impress & France is Downgraded!
Before Thursday’s open, investors digested a slew of data. Overseas, The Bank of England held rates steady and said they would not print more money in the foreseeable future which was a backhanded vote of confidence for their economy. Meanwhile, the ECB also held rates steady which put pressure on European politicians to resolve their ballooning debt crisis. Spain and Italy both held successful bond auctions which helped alleviate short term refinancing fears. U.S. economic data failed to impress. First, weekly jobless claims topped estimates and rose by +24,000 to a seasonally adjusted 399,000 which was the highest level in six weeks and very close to the closely followed 400,000 mark. The four-week average also jumped to 381,750 from 374,000 in the prior week. Separately, the Commerce Department said retail sales rose +0.1% last month which fell short of the Street’s estimate for a gain of +0.3%. It was also the weakest reading in seven months. Finally, the Commerce Department said businesses inventories grew by +0.3% in November. Stocks slid on Friday after S&P cut several European nation’s credit ratings due to their ballooning debt.
Market Outlook- New Rally Confirmed
Risk assets (stocks, FX, and commodities) have been acting better since the latter half of December. Now that the major U.S. averages scored a proper follow-through day the path of least resistance is higher. Looking forward, one can err on the long side as long as the benchmark S&P 500 remains above support (1260). Leadership is beginning to improve which is another healthy sign. Now that the 200 DMA line was taken out it will be important to see how long the market can stay above this important level. 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!