We are headed higher- only question is when?

Friday, November 02, 2012
Stock Market Commentary:

The major averages gave back earlier gains on Friday to end the shortened week relatively flat. The benchmark S&P 500, DJIA, and small-cap Russell 2000 pulled back after encountering resistance near their respective 50 DMA lines. For months, the 50 DMA line served as formidable support and it now appears to have become resistance. So far, this appears to be nothing more than a normal pullback after a big run evidenced by the fact that the benchmark S&P 500 is “only” -4% below its 52-week high and the tech heavy Nasdaq composite is -6.5% below its multi-year high of 3196. If the selling continues then the correction becomes more severe. Normally, one would like to see the bulls show up and defend the 50 DMA lines for the major averages and leading stocks. The fact that all the major averages violated their respective 50 DMA lines in the first half of October coupled with lousy action in several leading stocks since then caused us to change the status of this rally from “rally under pressure” to “market in a correction.” Thursday’s large accumulation day caused us to say the market is back in rally-mode as long as the major averages stay above their 200 DMA lines. In the event the 200 DMA line is breached, then one should expect a new leg lower to commence. Conversely, if the 50 DMA lines is repaired then odds favor higher prices will follow. Remember, over the next several weeks as we make our way through Q3 earnings season- it is very important to not only focus on the actual numbers but more importantly how stocks (and the major averages) react to the numbers. So far the reaction has been less than stellar.

Monday-Wednesday’s Action- Sandy Shuts Markets; 200 DMA Line Is Support

Hurricane Sandy forced most of the Mid-Atlantic and North East to shut down on Monday and Tuesday. U.S. stocks, options and other exchange-based derivatives were closed for both days which was the stock market’s first two-day weather-related shutdown since 1888! On Monday, Personal income rose in September by +0.4% which matched estimates. Meanwhile, personal spending rose by +0.8% which topped the Street’s estimate for a gain of +0.6%. Finally, core personal consumption expenditures inched higher by +0.1% which matched estimates. A slew of other important data such as US corporate earnings was pushed back due to the storm. In Europe, Spain’s Flash GDP suggested Spain’s troubled economy fell by -0.3% last quarter which slightly topped the Street’s estimates for a decline of -0.4%. In other news, the Bank of Spain confirmed that the “bad bank” will have a maximum size of 90 billion euros with an initial transfer of 45 billion euros from troubled Spanish banks. 
Stocks were quiet on Wednesday as the market breathed a sigh of a relief after the two day shut down. A business gauge from the ISM in Chicago rose to 49.9 in October from 49.7 in September. This fell short of the Street’s estimate for 54 and below the boom/bust level of 50. Apple flirted with its 200 DMA line after Tim Cook said mobile software head Scott Forstall and retail leader John Browett were stepping down in the wake of the map debacle. 

Thursday & Friday’s Action- 50 DMA line is Resistance

Stocks rallied on Thursday as investors digested a slew of economic data, most of which topped estimates, from across the globe. China said its official and private sector factory surveys grew for the 12th consecutive month, albeit at a slow rate. Before Thursday’s open, ADP, the country’s largest private payrolls company, said US employers added 158k new jobs in October which beat the Street’s estimate for a gain of 143k. ADP is using a new methodology to calculate their numbers. It will be interesting to see if this new method will strengthen the correlation between the ADP # and the official BLS jobs report each month. So far the correlation is weak at best. In other news, weekly jobless claims slid by 9k to 363k which was below the Street’s estimate for 375k. Third quarter unit labor costs slid by -0.1% which missed the average forecast for a gain of +1.4%. Meanwhile, productivity rose by +1.9%, better than the 1.6% estimate, according to a preliminary reading.  Construction spending rose +0.6% in September to an annual rate of $851.6B which is the highest level in three months. The Conference Board said consumer confidence jumped to 72.2 last month which was the highest reading in four years and bodes well for the ongoing economic recovery. The ISM manufacturing index rose to 51.7 which beat the average estimate of 51.5 and bodes well for the economy. Before Friday’s open, the Labor Department said U.S. employers added 171k new jobs last month which topped the Street’s estimate for 125k and the unemployment rate held steady at 7.9%. The major averages opened higher but closed lower after encountering resistance near their respective 50 DMA lines. 

Market Outlook- Rally Resumes But Under Pressure:

From our perspective, the multi-month rally resumed on Thursday, November 1, 2012 after the major averages bounced off support (200 DMA lines) on heavier volume than the prior session. We will turn more bullish once the major averages trade back above their respective 50 DMA lines. A new correction will begin if/when the major averages slice below their respective 200 DMA lines. As always, keep your losses small and never argue with the tape. 

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