Friday, October 26, 2012
Stock Market Commentary:
The major averages ended in the red last week but the bulls showed up and defended the Nasdaq’s 200 DMA line- for now. So far, this is nothing more than a normal pullback after a big run evidenced by the fact that the benchmark S&P 500 is just over -4% below its 52-week high and the tech heavy Nasdaq composite is -6.5% below its multi-year high of 3196. If the selling continues then the correction becomes more severe. Normally, one would like to see the bulls show up and defend the 50 DMA lines for the major averages and leading stocks. The fact that all the major averages violated their respective 50 DMA lines in the first half of October coupled with lousy action in several leading stocks caused us to change the status of this rally from “rally under pressure” to “market in a correction.”. Remember, over the next several weeks as we make our way through Q3 earnings season- it is very important to not only focus on the actual numbers but more importantly how stocks (and the major averages) react to the numbers. So far the reaction has been less than stellar.
Monday-Wednesday’s Action- 50 DMA Line Becomes Resistance
Stocks spent most of the session in the red on Monday and fell further below their respective 50 DMA lines. However, a late day rally helped the major averages squeeze out a small gain and close in the black. Apple (AAPL) was one of the standout winners, jumping 4% after Topeka raised its Q4 earnings estimates and Goldman Sachs (GS) reiterated its “buy” rating and $810 price target. By Friday, that price target was cut to the mid 700’s. Earnings news was decent; Caterpillar (CAT), Peabody Energy, and Yahoo (YHOO) were among some of the well-known companies that released stronger than expected numbers on Monday.
Stocks opened sharply lower on Tuesday on the heels of fresh European debt woes and a series of weaker-than-expected earnings data in the U.S. Spain dominated the headlines after Moody’s downgraded five regions and it is largely expected that GDP will contract by -0.4% in Q3. Catalonia, which accounts for a fifth of Spain’s economy, was downgraded and that bodes poorly for Spain’s ability to grow in the future. In the U.S., 3M (MMM) and DuPont (DD) were among the latest high profile companies that missed estimates and reiterated fears that a global slowdown was upon us. Apple released several new products on Tuesday but its stock still ended lower.
Stocks opened higher but closed lower on Wednesday as investors digested a flurry of mixed economic and earnings data from across the globe. Overnight, China said its HSBC Flash manufacturing PMI index rose to 49.1 which topped estimates and was the best reading in three months. Meanwhile,the business climate in Europe remains weak. The Eurozone composite PMI hit its lowest level since 2009. Greece was granted a two year extension to implement their much needed austerity measures which helped alleviate some pressure on the troubled eurozone. Earnings were mixed. Facebook (FB), AT&T (T), Panara Bread (PNRA), Netflix (NFLX), and Boeing (BA) were a few of the high profile companies which reported Q3 earnings. In the U.S., the Commerce Department said new home sales surged 5.7% to their highest level since April 2012. As expected, the FOMC held rates steady and reiterated their recent stance regarding QE Infinity.
Thursday & Friday’s Action- Stocks Slide On Soft Earnings Data
Stocks opened higher on Thursday after England officially exited its double dip recession and GDP grew by 4% on an annualized basis. This bodes well for the global economy. Before Thursday’s open weekly jobless claims fell to 369k which was a smaller decline than expected and durable goods vaulted an impressive +9.9%, topping the Street’s estimate. After the open, pending home sales for September inched higher by +0.3% which missed the 2.8% forecast. After Thursday’s close Apple (AAPL) and Amazon (AMZN) were a few high profile companies which released their Q3 results. Stocks ended flat on Friday after the government said Q3 GDP rose 2%, topping the Street’s estimate for 1.8%.
Market Outlook- Market In A Correction:
From our perspective, the multi-month rally ended on Friday 10/19/12 when all the major averages traded below their respective 50 DMA lines and a slew of leading stocks broke down in heavy volume.  On October 9, 2012 we noted that the market rally was under pressure and if the major averages violated their respective 50 DMA lines the market would enter correction territory. Normally, when this happens we begin to raise cash and adopt a more defensive stance. We will turn more bullish if/when all the major averages jump back above their respective 50 DMA lines. Until then caution is king. As always, keep your losses small and never argue with the tape. 

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