Friday, October 15, 2010
Stock Market Commentary:

The 7-week rally continued on Wall Street as the US dollar continued to fall and gld surged to a fresh record high. Volume patterns remain healthy as the major averages continue their 7-week rally. Healthy volume patterns are important because they suggest large institutional investors are aggressively buying, not selling, stocks.   It is also encouraging to see, 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.

Monday-Wednesday’ Action: Stocks Rally As Dollar Falls!

Stocks ended relatively flat on Monday as investors digested the prior week’s large move and the IMF concluded its weekend meeting. Overnight, stocks in Europe and Asia rallied after the IMF and global leaders met in Washington D.C. to discuss the global economy. Global leaders reaffirmed their support for continued global economic growth coupled with low debt. Elsewhere, the National Association for Business Economics (NABE) said its 46-member forecasting panel cut US economic growth projections for both 2010 and 2011 to just +2.6%. In May, the last time they were surveyed, their outlook was +3.2%. Remember that earnings season has begun and it is very important to protect your capital in the event of an adverse reaction to earnings.
On Tuesday, stocks opened lower as the US dollar rallied and concern spread that China’s economic growth may begin to slow but the bulls showed up in the afternoon on renewed prospects of QE 2. At 2pm EST, the Federal Reserve released the minutes of their September 21 meeting. As expected, the minutes echoed the Fed’s recent rhetoric and showed that policy makers are willing to step up and defend the US economy from entering a double dip recession, if needed. The USD fell and the major averages rallied after the minutes were released. The minutes also showed that policy makers are prepared to ease monetary policy “before long” and focused on purchases of Treasuries and boosting inflation expectations as ways to add stimulus.

Wednesday- Friday’s Action- Stocks Jump On Earnings and QE2 Expectations:

On Wednesday, stocks soared after the latest round of stronger than expected earnings and economic data hit the wires. The rally began overnight when Japan reported machinery orders surged +10.1% compared to a -4.5% decline forecast. More stronger than expected economic data was released in the US when import prices fell in September, reflecting a drop in energy prices. The -0.3% decline in the import-price index topped the median forecast and followed a +0.6% gain in August. Earnings news also topped estimates with companies such as CSX Corp (CSX), Intel Inc. (INTL), and JPMorgan Chase (JPM) releasing their Q3 results. The fact that the market rallied on the news bodes well for this 7-week rally.
Stocks slid on Thursday after US producer prices rose in September for a second straight month. This was the first sign that inflation may be looming. Overnight, Singapore’s central bank decided to raise rates to combat inflation and ease restrictions on their currency. Singapore’s economy grow over +19% last quarter which makes it one of the fastest growing economies in the world! This sent the USD lower and a slew of dollar denominated assets higher. US stocks fell largely due to pressure from the highly influential banking sector. A slew of banks got smacked on Thursday as foreclosure fears spread. After Thursday’s close, Google Inc’s (GOOG) shares jumped +7% after they company reported solid Q3 results.
Friday was a relatively quiet day as investors digested the latest round of economic and earnings news. Before Friday’s open, Ben Bernanke gave a speech in Boston which signaled that he was ready for another round of quantitative easing, if needed. Meanwhile, the consumer price index (CPI) was a non event which helped allay inflation woes. However, consumer confidence edged lower which put pressure on equities. Interestingly, the USD hit a new 5-month low early Friday morning, then positively reversed which could mark the end of its steep two month decline. That said, if the dollar starts to rally here we could see the major averages pullback to logical areas of support (recent moving averages) to help consolidate their recent move.

Market Action- 7-Week Confirmed Rally:

So far, the action since this rally was confirmed on the September 1, 2010 follow-through day (FTD) has been very strong and stocks are simply pausing to consolidate their recent gains. It was encouraging to see the bulls show up and defend support (formerly resistance) in recent weeks. 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. Trade accordingly.

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