Tuesday, November 1, 2011
Stock Market Commentary:
Stocks were off to a weak start in November after the Greek Prime Minsiter rattled confidence in the latest bailout plan by offering a referendum to vote on the proposed measures. From our point of view, this plan – to use leverage to 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, desperate times call for desperate measures. 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 and trade accordingly, not stand in the way of them. The benchmark S&P 500 (SPX) and Nasdaq composite are now negative for the year which is not ideal. Stocks confirmed their latest rally attempt on Tuesday (10.18.11) day 12 of their rally attempt when the SPX and NYSE composite scored proper follow-through days (FTD). It is important to note that every major rally in history began with a FTD but not every FTD leads to a new rally and the current rally is under pressure. That said, one can err on the bullish side as long as the major averages remain above their 50 DMA lines.
Greek PM Shakes Confidence & U.S/Chinese MFG Data Not Thrilling:
Risk assets fell for a second straight day after the Greek PM asked for a referendum to support the latest bailout plan and the latest manufacturing data was lackluster in China and the U.S. The Institute for Supply Management (ISM) said its manufacturing index fell to 50.8 from 51.6 in the prior month but missed expectations of 52.0, according to a Reuters poll. The latest mfg data from China was less than thrilling.
Volatility Is Off The Charts- Caution is advised!
At this point, the market is in the process of pulling back. We wrote yesterday that, “They key is to ascertain the health and duration of the pullback to see if it is an orderly (i.e. normal) pullback or something more severe.” So far, the past two days have been anything but orderly. The VIX, which measures volatitlity, surged over 20% today and is back in the mid 30’s. The bulls are losing control since the SPX broke below 1230, effectively negating its latest breakout (from its double bottom base). The next level of support is the 50 DMA line (1190).
Market Outlook- Rally Under Pressure:
The current rally is under pressure due to the recent severe sell off that sent the SPX below 1230. This means that caution is king until the bulls regain control of this market. In addition, it is important to note that the bulls failed to send the major averages above their respective 200 DMA lines in late October. 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, please contact us for more information.