Stocks Mixed, Commodities Down; USD Up

Wednesday, October 27, 2010
Stock Market Commentary:

Stocks opened lower then rallied back into positive territory as the US dollar rallied, the S&P Case-Shiller index disappointed investors, and consumer confidence topped estimates. Volume patterns remain healthy as the major averages have now begun the 9th week of their ongoing rally. However, it is important to note that there have been an ominous number of distribution days that have emerged in the popular indexes in recent sessions which suggests caution. On average, market internals remain healthy evidenced by an upward sloping Advance/Decline line and the fact that new 52-week highs continue to easily outnumber new 52-week lows on both exchanges.’

Economic Data Is Strong; Market Falls:

Stocks and commodities fell as the USD continued rallying after the latest round of solid economic data was released. Durable goods orders rose +3.3% last month which topped estimates. Meanwhile, the Commerce Department said sales of new houses jumped +6.6% last month to a 307,000 annual rate which also topped estimates. The stronger than expected economic data caused many to believe that the Fed may not completely enact QE 2 when they meet next Wednesday. So far, the market has been rising on the notion that the Fed will step up and buy another trillion dollars (or so) worth of “safe” investments (i.e. bonds). However, with the recent bout of “stronger than expected economic data, investors are concerned that the Fed will “only” buy $500 billion worth of bonds. Keep in mind that in 2009, the Fed bought $1.5 trillion worth of “safe” assets which helped propel other so-called “riskier” assets (i.e. stocks and commodities) higher.

Market Action- Confirmed Rally, Week 9:

Heretofore, the action since this rally was confirmed on the September 1, 2010 follow-through day (FTD) has been strong but the market action has been wide-and-loose which is not a healthy sign. The S&P 500 sliced below its two month upward trendline (shown above) which is not ideal. The next level of support for the major averages is their September highs, then their respective 200-day moving average (DMA) lines while the next level of resistance is their respective April highs. We have enjoyed large gains since the September 1st FTD and for the first time, the tape is getting sloppy.  Trade accordingly.

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