Monday, December 5, 2011
Stock Market Commentary:
Risk assets were mixed on Monday as optimism spread regarding the European debt crisis. From our point of view, the market confirmed its latest rally attempt on Wednesday, November 30, 2011 when all the major averages soared 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.
All Eyes on Europe: Sarkozy & Merkel Make A New Plan & Italy Passes New Austerity Package
On Monday, stocks rallied after French President Nicolas Sarkozy and German Chancellor Angela Merkel completed an agreement on a new plan to help resolve the euro zone debt crisis. Elsewhere, Italy’s new government unveiled austerity measures to help curb their onerous debt woes. This is going to be a busy week for Europe: U.S. Treasury Secretary Tim Geithner will be there for most of the week and the weekend talking with EU leaders about possible solutions to their ongoing debt crisis. On Thursday, the ECB and BOE (Bank of England) will concluded their final meeting for the year and this weekend there will be another EU Summit aimed at tackling their debt crisis.
Market Outlook- Confirmed Rally
The benchmark S&P 500 (SPX) is now flat for the year while the other major averages are now positive for the year which bodes well for the risk on trade and 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). However, 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!