Daily Market Commentary

Day 7: Light Volume Fails To Confirm The Latest Rally Attempt

Tuesday, February 16, 2010
Market Commentary:

The major averages ended higher after the latest round of stronger than expected economic and earnings data was released. Volume, a critical indicator of institutional sponsorship, was lower than the prior session on both exchanges which prevented the major averages from producing a sound follow-through day.  Advancers trumped decliners by a large margin on the NYSE and Nasdaq exchange.  New 52-week highs outnumbered new lows on both exchanges.  There were 35 high-ranked companies from the CANSLIM.net Leaders List that made a new 52-week high and appeared on the CANSLIM.net BreakOuts Page, up from the 18 issues that appeared on the prior session.

Strong Manufacturing Data Lifts Stocks:

Continuing the recent trend that has prevailed for most of this year, the stock market opened with impressive gains on the first trading day of the week. In recent months, that has been followed by steady selling for the remainder of the week. Before Monday’s opening bell, the NY Fed released its Empire State Mfg index which topped the Street’s estimates. This was the fastest reading in four years and the first manufacturing report that was released in February. The stronger than expected report suggests that business conditions improved nearly +9 points to 24.91.

Q4 Earnings Are Strong:

In earnings news, Barclays (BCS) doubled its profit in 2009 which set the stage for a strong rally. The strong results suggest that banks are acting well and are on track for a strong 2010. The healthy economic and earnings data sent the dollar lower and helped offset concern that Greece will default on its ballooning debt. This week, approximately 45 companies in the S&P 500 are slated to release their Q4 results as earnings season winds down. So far, more than 350 companies in the S&P 500 have reported fourth-quarter earnings and about three-quarters of them have topped estimates according to Bloomberg.com.

Market Action:

Looking at the market, the major averages enjoyed robust gains on Tuesday but volume failed exceed the prior day’s session which indicates that large institutions are not aggressively buying stocks. As long as February 5th lows are not breached the window remains open for a new follow-through day (FTD) to emerge. A new follow-through day will confirm the current rally attempt and will be produced when one of the major averages rallies at least +1.7% on higher volume than the prior session as a new batch of leaders breakout of sound bases. However, if 2.5.10 lows are breached then the day count will be reset and a steeper correction may unfold.
It is also important to see how the major averages react to their respective 50-day moving average (DMA) lines which were support and are now acting as resistance. Until they all close above that important level the technical damage remaining on the charts is a concern. So far, the market’s reaction has been tepid at best to the latest round of economic and earnings data which remains a concern. Remember that the market remains in a correction until a new new follow-through day emerges. Until then, patience is paramount.
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