Stocks Rally On Bullish Housing Data

SPX- Stocks Close Above 50 DMA line

Stocks Close Above 50 DMA line; Next Level 200 DMA

Tuesday, December 20, 2011
Stock Market Commentary:

Stocks rallied after the latest round of U.S. housing data topped estimates which bodes well for the ailing housing market. From our point of view, the market is back in a correction as the latest follow-through day (FTD) failed after the benchmark S&P 500 sliced below its 50 DMA line. This is just another example of how erratic markets have been of late. The global macro picture is deteriorating which is not ideal for U.S. stocks. Remember our mantra: Remain flexible in your approach, always cut your losses, and never argue with the tape.

Housing Starts Boost Stocks

On Tuesday, stocks and a slew of commodities rallied which helped alleviate their deeply oversold levels. A slew of housing stocks rallied after housing starts jumped in November. Housing starts jumped to an annualized rate of 685,000 units last month which easily topped the Street’s expectation of 627,000 units. November’s reading also topped October’s reading of 627,000 units. Separately, building permits rose to a pace of 681,000 which also topped estimates and the prior month’s rate of 644,000.

Market Outlook- In A Correction

The benchmark S&P 500 (SPX), Russell 2000, and Nasdaq composite are all back in negative territory for the year which is not ideal. Meanwhile, the Dow Jones Industrial Average is up slightly for the year. We find it very disconcerting to see other (leading) risk assets flirt with fresh 2011 lows in recent weeks/days. China’s Shanghai Composite (normally a leading risk on/off indicator) has fallen below its October low and hit a new 2.5 year low. The euro, which is strongly correlated to U.S. stocks and other risk assets also took out its October low on Tuesday (12/13) which is not ideal. Meanwhile, Gold sliced below its longer term 200 DMA line on on Wednesday (12/14) for the first time since August 2008 (1-month before Lehman failed) and remains below that critical level. Other risk assets such as Oil, Silver, Copper, etc are also under pressure which suggests the global risk off trade is getting stronger.  As an easy reference point, if the benchmark S&P 500 would simply fall to its Oct low, that would be 1074! Sometimes, caution is king.

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. 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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