Monday, November 7, 2011
Stock Market Commentary:
Stocks rallied on Monday as fears shifted from Greece to Italy regarding the next European domino to fall. From our point of view, the current EU bailout plan- to use leverage & add more debt to a debt crisis- is foolish at best and does not address the broader issues (i.e. the other PIIGS countries are broke). We are starting to see these “issues” rise to the fore. Our job is to trade on what we see happening, not on what we think will happen. We do this by gathering the facts, interpret how the markets react to the news and trade accordingly, not stand in the way of them. The benchmark S&P 500 (SPX) and Nasdaq composite are back in positive territory for the year which bodes well for risk assets. Stocks confirmed their latest rally attempt on Tuesday (10.18.11) day 12 of their rally attempt when the SPX and NYSE composite scored proper follow-through days (FTD). It is important to note that every major rally in history began with a FTD but not every FTD leads to a new rally and the current rally is under pressure. That said, one can err on the bullish side as long as the major averages remain above their 50 DMA lines.
First Greece, Now Italy:
Over the weekend, Greek PM secured his job (for now) and is forming a coalition government to tackle their onerous debt woes. Meanwhile, the international focus shifted from Greece to Italy which is the next European domino that might fall. Reports surfaced that Italian Prime Minister Silvio Berlusconi was about to resign but Berlusconi quickly denied the rumors. Berlusconi is trying to win over undecided members of parliament and stop a group of party rebels from toppling his government. Euro zone finance ministers met in Brussels on Monday for a regular, scheduled meeting, but spent most of the time discussing the ongoing turmoil in the region.
Market Outlook- Rally Under Pressure:
The current rally is under pressure due to the recent severe sell off that sent the SPX below 1230 and erased half of October’s gains. This means that caution is king until the bulls regain control of this market. In addition, it is important to note that the bulls failed to send the major averages above their respective 200 DMA lines and the neckline of their ominous head-and-shoulders top pattern (1250) in late October. We have to expect this sloppy, wide and loose action to continue until that level is repaired and higher prices follow. Our longstanding clients/readers know, we like to filter out the noise and focus on what matters most: market action. If you are looking for specific help navigating this market, please contact us for more information.