Friday, August 19, 2011
Stock Market Commentary:

Stocks ended lower for the fourth consecutive week as fear spread that the global economy is slowing and inflation is accelerating throughout much of the developed world. In the U.S., the window remains open for a new FTD to emerge which will confirm the current rally attempt. Technically, as long as last Tuesday’s (8.16.11) lows hold. However, there is no rush to buy ahead of a FTD because doing so increases the odds of failure. To be clear, the bears remain in control of this market until the major averages close above their longer term 200 DMA lines or a new FTD emerges. A new follow-through day will emerge when at least one of the major averages rallies at least +1.8% on higher volume than the prior session. Until that happens, this is just a normal “oversold” bounce. Near term resistance remains the 200 DMA line and near term support remains the 2011 lows.

Monday-Wednesday’s Action: Oversold Bounce

Stocks rallied enjoyed large gains on Monday after some $19 billion of new M&A news was announced. However, volume, a critical component of institutional sponsorship was very light. One of the most popular deals was Google’s (GOOG) announcement that they planned to acquire Motorola Mobility Holdings (MMI) for $12.5 billion. On Tuesday stocks slid after the Commerce Department reported that housing starts slid -1.5% to a seasonally adjusted annual rate of 604,000 units. A separate report showed U.S. industrial output rose +0.9% last month, more than double June’s +0.4% and the fastest gain in 7 months. In Europe, France and Germany ruled out a new Euro Bond which was designed to help alleviate Europe’s onerous debt burdens but agreed to several other factors aimed at restoring confidence in the troubled continent. The latest GDP data out of Europe missed estimates.
Stocks ended higher on Wednesday as investors digested the latest round of economic data. The Mortgage Bankers Association (MBA) said mortgage applications slid by a disturbingly large -9.1%. Separately, the Labor Department said its produce price index (PPI) rose +0.2% despite lower energy prices. Core prices, which exclude food and energy, rose +0.4% which was the largest increase since January and rose+0.3% in June. Since the March 2009 bottom, inflation has remained largely at bay which has helped alleviate pressure on the Federal Reserve to raise rates. However, if inflation swells over the next few quarters than the Fed may be put in a precarious situation; raise rates to curb inflation or leave rates low to stimulate the stale economy?

Thursday & Friday’s Action: Risk Assets Smacked:

Before Thursday’s open, overseas markets were down several percentage points after news spread that a European bank borrowed $500M from the ECB. This sparked fresh concerns that European banks may be under severe stress. Economic data in the U.S. was not ideal. The Labor Department said weekly jobless claims rose to 408,000 which topped the Street’s estimate for 400,000. This bodes poorly for the ailing jobs market and by extension the broader economy.
Separately, the consumer price index (CPI) rose by +0.5% in July which easily topped the Street’s estimate for a +0.2% increase. This echoes Wednesday’s higher than expected produce price index (PPI) which suggests inflation may be accelerating. If inflation continues to increase, then the Fed will be under pressure to raise rates in the near future. The Philly Fed Survey tanked to -30.7 which was way below the Street’s estimate for 1.0. Existing home sales slid last month to an annualized rate of 4.67 million, which is less than the rate of 4.87 million units that had been expected. On a positive note, leading indicators edged higher +0.5% in July which topped the +0.2% estimate. Stocks were relatively quiet on Friday as investors digested Thursday’s large move.

Market Outlook- Market In A Correction

The latest action in the major averages suggests the market is back in a correction as all the major averages remain below key technical levels. Our longstanding clients/readers know, we like to filter out the noise and focus on what matters most: market action. That said, the recent action suggests caution is paramount at this stage until all the major averages rally back towards their respective 200 DMA lines. If you are looking for specific help navigating this market, please contact us for more information.