Stocks and a slew of other risk assets ended higher during this shortened holiday week as investors digested a second Greek bailout and a slew of stronger than expected economic and earnings data from the U.S. From our point of view, the major averages confirmed their latest rally attempt on Tuesday 1.3.12 which was Day 9 of their current rally attempt. It was also encouraging to see the S&P 500 break above its downward trendline and its longer term 200 DMA line. Looking forward, the S&P 500 has done a great job staying above its Q4 2011 high (~1292) and is now doing its best to stay above 1356 which corresponds with July’s high. The next level of resistance is 2011’s high just above 1370. The bulls remain in control as long as the benchmark S&P 500 trades above 1292 and then its 200 DMA line. Leadership continues to improve which is another healthy sign

Monday-Wednesday’s Action:

The stock market in U.S. was closed on Monday in observance of the President’s Day holiday. However, U.S. futures, and oversea’s markets enjoyed nice gains on Monday on renewed optimism vis-a-vis the latest bailout for Greece. On Tuesday, the Dow Jones Industrial Average topped 13,000 for the first time since May 2008. The DJIA has been up every month since October and is currently enjoying one of its strongest rallies since the March 2009 low! Meanwhile, the tech-heavy Nasdaq composite has already taken out its 2007 high and is currently sitting at its highest level since December 2000! Make no mistake about it, the bulls are clearly in control of this market as the global economy continues to recover from the Great Recession in 2008 and 2009. In the short term, stocks are very extended to the upside and a 5-9% pullback would be considered “normal” and “healthy” for this very strong bull market. Until then, one would be wise to not fight this very strong tape!
Stocks opened lower on Wednesday after China said its manufacturing sector slid for the fourth consecutive month. The HSBC purchasing managers index (PMI) rose to a four month high at 49.7 but still remained below the critical boom/bust line of 50. The PMI is used as an early indicator for China’s industrial activity and was hurt due to sagging exports to Europe. Elsewhere, the European Central Bank said that it wants local governments to begin taking responsibility for shoring up their country’s finances.

Thursday & Friday’s Action: Stagflation in Europe Weighs On Markets, U.S. Economic Data Tops Estimates

Before Thursday’s open, a report was released that forecasts the 27-nations in the European Union, which are responsible for a fifth of the global economy, to experience stagflation in 2012. Stagflation is a situation in which one’s economy is stagnate, if not contracts, coupled with high unemployment and higher inflation. The report expects the euro-zone to fall into a recession in 2012 which would be the first time the EU was in a recession since the Great recession in 2009. Economic data in the U.S. continued to be positive. The Labor Department said weekly jobless claims were unchanged at 351,000 which beat the Street’s estimate for a slight gain to 354,000. Needless to say, this bodes well for both the U.S. and global economy. Stocks reacted favorably on Friday after U.S. consumer confidence easily topped estimates. Meanwhile, the Commerce Department said new home sales fell by -0.9% in January to a seasonally adjusted 321,000-unit annual rate. The report topped estimates for an annual rate of 315,000.