Daily Market Commentary

Consumer Spending, Incomes, & Inflation Rise

Monday, March 26, 2011
Stock Market Commentary:

Stocks opened higher on Monday after U.S. consumer spending rose more than expected last month. It was encouraging to see a slew of leading stocks and the benchmark S&P 500, Dow Jones Industrial Average, Nasdaq composite, and small cap Russell 2000 index all close above their respective 50 DMA lines last week. The 28-week rally, which began on the September 1, 2010 follow-through day (FTD), ended on Thursday March 10, 2011 when all the major U.S. averages plunged below their respective 50 DMA lines in heavy trade. However, the correction was short lived when a new rally was confirmed on Thursday March 24, 2011′s healthy action. The healthy action suggests the bulls are back in control.

Consumer Spending Tops Estimates & Incomes Rise

Before Monday’s open, consumer spending in the U.S. rose more than forecast as incomes rose. The Commerce Department said purchases rose +0.7% in February which was the strongest increase since October 2010 and bodes well for the economic recovery. Meanwhile, U.S. income rose +0.3%, less than forecast, as the Federal Reserve’s preferred measure of inflation rose. Elsewhere, according to Bloomberg, U.S. corporations are beginning to spend the record $940 billion in cash they have accumulated after the credit crisis. Out of the U.S. corporations that have tapped their cash reserves the lion share have decided to pursue strategic mergers and acquisitions. M&A’s topped $256 billion in Q1 2011 which is the highest level since the collapse of Lehman Brothers Holdings Inc. in September 2008. So far in Q1 2011, companies in the S&P 500 have authorized +38% more buybacks in han the same period in 2010 and dividends may increase to a record $31.07 a share in 2013, according to data complied by Bloomberg.

Market Action-Confirmed Uptrend

From our point of view, the market is back in a confirmed uptrend after a modest (and healthy)-6% correction from its post-recovery highs. The fact that the Dow Jones Industrial Average, small-cap Russell 2000 index, and Copper all closed above their respective 50 DMA lines on Wednesday March, 23 was a very healthy sign and suggests higher prices will follow.  The very next day, the benchmark S&P 500 regained that important level and broke above its downward trendline (shown above). Couple that with the fact that other markets like Oil, Silver, and Gold are all at fresh post recovery highs suggests it is only a matter of time until equities follow. The final bullish sign for us was that a slew of high ranked stocks triggered fresh technical buy signals this week which suggests higher, not lower prices lie ahead. If you are looking for specific help navigating this market, please contact us for more information.

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