Monday, December 21, 2009

Market Commentary:

The major averages rallied on Monday as the latest round of merges and acquisitions were announced. As expected, volume, an important indicator of institutional sponsorship, was lower than Friday’s quadruple witching inflated levels. Advancers led decliners by over a 2-to-1 ratio on the NYSE and by nearly a 2-to-1 ratio on the Nasdaq exchange. There were 43 high-ranked companies from the CANSLIM.net Leaders List that made a new 52-week high and appeared on the CANSLIM.net BreakOuts Page, higher from the total of 26 issues that appeared on the prior session. New 52-week highs still outnumbered new 52-week lows on the NYSE and on the Nasdaq exchange.

U.S. Dollar & Stocks:

It was encouraging to see the major averages rally even as the U.S. dollar advanced. Since early December, the inverse relationship between the U.S. dollar and U.S. equities has quietly weakened. For most of this month, the U.S. dollar has steadily advanced but, instead of falling, the major averages have managed to hold their own and move sideways to slighter higher during that period. However, the inverse relationship remains stronger in other dollar denominated assets. For example, gold tumbled nearly -11% from its 2009 high while crude oil slid nearly -15%. Will this be the new norm?
M&A & P/E News:
In recent quarters, U.S. companies are paying some of the largest premiums on record as M&A activity increases. Many analysts believe that this is a sign that executives are growing more bullish about earnings and the economy even after the strongest 8-month rally for the Standard & Poor’s 500 Index in 73 years! Analysts believe that mergers may surge +35% in 2010 and +23% in 2011 as credit begins to flow again. The data, compiled by Sanford C. Bernstein, is based on M&A’s that occurred since 1980. Their research incorporates growth in GDP, corporate earnings and commercial loan volume. That said, the S&P 500’s price to earnings (P/E) ratio is just over 22.2 times its companies’ profits over the past 12 months and is expected to fall to 11.6 when measured against analysts’ 2011 forecast. Of course, the actual results could be different next year but, all things being equal, suggests more M&A news is on the horizon.

Price & Volume Action Is Strong!

It was very encouraging to see the Nasdaq breakout of its current trading range and hit a new 2009 high on Monday! It is also very encouraging to see the Philly Semiconductor Index (SOX) gap higher and hit a fresh 2009 high as well. Meanwhile,the Dow Jones Industrial Average and S&P 500 closed just below 10,500 and 1,120, their respective resistance levels. Apple Inc. (AAPL) closed above its 6-week downward trendline and above its 50 day moving average line which is a healthy sign and bodes well for this 42-week rally.