Week 2: Stocks & Commodities Fall

Friday, November 19, 2010
Stock Market Commentary:

Stocks and commodities ended in the upper half of their respective ranges for the week after Ireland’s central bank said it will accept an emergency loan from the EU/IMF. The rally which began on the September 1, 2010 follow-through day ended on Tuesday as stocks and commodities plunged in heavy trade. Wednesday marked day 1 of a new rally attempt, which means the earliest a possible FTD could emerge will be Monday, November 22, 2010.

Monday- Wednesday’s Action: Stocks & Commodities Smacked As Dollar Soars:

On Monday, stocks and commodities ended mixed as the USD advanced against the euro. The “big” story that continues to weigh on the market is the ongoing geopolitical woes in Europe. Over the weekend, both the IMF and Irish government said Ireland does not need additional aid to stay solvent. In Italy, four top officials in Italian Prime Minister Silvio Berlusconi’s government, including a Cabinet minister, will resign today in a move designed to trigger early elections and topple oust the current regime. In the U.S., retail sales topped estimates in October, thanks in part to stronger auto sales. The news helped lift stocks and offset concern from a softer than expected mfg report from the NY region.

On Tuesday, stocks and commodities got smacked as the euro plunged to a fresh multi-month low and the USD continued marching higher. Ireland’s government held an emergency meeting to discuss the possibility of a bailout. In other news, Austria said it did not want to contribute to Greece’s bailout because they did not satisfy several conditions of their prior bailout. In the US, the producer price index (PPI) came in less than expected which allayed inflation woes but sparked concerns about deflation.

Consumer Price Index Tame, Housing Starts Fall, EU Debt Woes Ease:

Wednesday was a quiet day as markets simply consolidated Tuesday’s large move. The euro squeezed out a small gain after CPI fell short of analyst estimates and housing starts plunged. The weaker dollar helped the major averages end relatively flat on the day. Overseas, the European Union has agreed in principle to help bailout Ireland. Looking forward, the two important questions are: 1.) how many more countries will need to be bailed out? 2.) How many more countries can the EU afford to bailout?

Thursday & Friday’s Action: Ireland’s Bailed Out & China Raises Reserve Requirement:

On Thursday, Ireland’s central bank said it is prepared to accept emergency aid from the ECB and the IMF which helped the euro surge nearly 2 handles! The weaker dollar helped send a slew of dollar denominated assets higher (mainly stocks and commodities). Elsewhere, the much anticipated GM IPO was a huge success which also helped the market rally. On the economic front, the news was positive: Philly Fed Mfg data surged while jobless claims were slightly higher. The stronger economic data helped stocks rally and bodes well for the global recovery. On Friday, China’s central bank said it was raising the reserve requirement on its banks in an effort to curb inflation and curtail their robust economy. The news put modest pressure on stocks and commodities.

Market Action- 12 Week Rally Ends – In A Correction:

The 12-week rally ended on Tuesday, November 16, 2010 after the major averages plunged in heavy volume back down towards their respective 50 DMA lines. In recent weeks, we have repeatedly written about how the major averages were experiencing wide-and-loose action after a big move and made it very clear that that was not a healthy sign. At this point, we are looking for a new rally to be confirmed with a new follow-through day before taking any new positions. However, we would be remiss not to note that the major averages deserve the bullish benefit of the doubt as long as they remain above their respective 50 DMA lines.  Caution and patience are key at this point. Trade accordingly.

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