Stocks & Euro Edge Higher; Oil & Gold Fall

Thursday, October 21,2010
Stock Market Commentary:

Stocks opened higher as the dollar fell (what else is new?) and the latest round of economic and earnings data was released. We sent out a note shortly after the open to our instituional advisory clients infomring them of the negative divergence we saw between Oil, Gold, and other capital markets. For most of the morning, oil and gold were down while the euro and US equities were up. Normally, they all move in tandem. Therefore, we were not surprised to see the major averages soften in the late morning. Heretofore, volume patterns remain healthy as the major averages are now in the latter half of their 8-week rally. However, it is important to note that there have been an ominous number of distribution days that have emerged in the popular indexes 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.

China’s Q3 GDP Growth Slows, But Inflation Rises:

Overnight, China said its economy grew +9.6% in the third quarter which was down from the +10.3% enjoyed in the second quarter but topped analyst estimates of +9.5%. Inflation rose in September and hit a 23-month high of +3.6%, which matched market expectations. The report also showed that GDP in the first three quarters of 2010 totaled 26.866 trillion yuan, which is on track to surpass 2009’s total of 34.05 trillion.

US Earnings & Economic Data Are Strong:

Before Thursday’s open, the Labor Department said initial jobless claims fell by –23,000 last week to 452,000. At 10:00 AM EST, the Conference Board’s index of leading indicators rose slightly and matched forecasts. On the earnings front, a slew of high profile companies released their latest quarterly results including but not limited to: McDonald’s Corp. (MCD, Netflix Inc. (NFLX), EBAY Inc., (EBAY), and United Parcel Service (UPS), On average, the numbers topped estimates but the reactions were mixed. The fact that the major averages continue to advance on the latest round of earnings and economic data bodes well for this 8-week rally. On the political front, Tim Geithner said he will lobby other finance ministers this weekend at the G-20 meeting to advance efforts to “rebalance” the world economy so it is less reliant on U.S. consumers.

Market Action- Confirmed Rally Week 8:

Heretofore, the action since this rally was confirmed on the September 1, 2010 follow-through day (FTD) has been strong but the market appears to be placing an interim top here as the major averages consolidate their recent move. The S&P 500 sliced below its two month upward trendline (shown above) which is not a healthy sign. 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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Sarhan Consulting provides both global macro and equity only consulting services to institutional clients around the world. For years, its clientele has participated in the firm’s objective market-based outlook, which has one primary goal: to provide stable trading ideas across all asset classes.

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