SPX Day 1 Of a New Rally Attempt Friday, November 16, 2012 Stock Market Commentary:
The major averages ended the week lower as they continue tracing out their 9-week downtrend (series of lower highs and lower lows) helping the bears remain in clear control of this market. It is important to note that the market is “oversold” and due for a bounce. Keep in mind that oversold markets can get a lot more oversold before they bounce. Friday marked Day 1 of a New Rally Attempt which means that the earliest a possible follow-through day could occur, to confirm this rally attempt, will be Wednesday, providing that Friday’s lows are not breached. If the lows are taken out, then odds favor lower, not higher prices, will follow and the day count will be reset. The path of least resistance is down until the major averages confirm their latest rally attempt. The pullback has now officially turned into a correction evidenced by the fact that several major averages are now more than 10% below their recent highs. So far, the reaction to earnings has been outright awful which suggests investors are not happy with the results or the implications for the future. To be clear, we expect a solution to the fiscal cliff and most likely stocks will rally on that news. If they don’t, that will be extremely bearish. Once that rally occurs we can analyze the rally but shall remain patient to see if a new uptrend emerges or if the stubborn two month downtrend continues.
On Monday, stocks opened higher but quickly turned negative as investors continued to wait for Washington D.C. to resolve the looming fiscal cliff. News from overseas was mixed to slightly better than expected. Japan said its economy contracted by -0.9% in Q3 which sparked concern that the Japanese economy will join Europe and fall into a recession in the near future. Meanwhile, China said its trade surplus topped estimates in October which was a welcomed sign. Concerns from Europe eased a bit after Greece approved its 2013 budget which was the next step for the debt-laden country to receive the next round of bailout funds. The big headline in the US occurred after Jefferies Group (JEF) agreed to be acquired by Leucadia National (LUK) for $3.7 billion. Leucadia National is a smaller version of Warren Buffett’s Berkshire Hathaway Inc (BRKA) and nicknamed “Baby Berkshire.”
Stocks opened lower but closed higher on Tuesday as optimism spread that the Fiscal Cliff will be resolved sooner rather than later. Overnight, futures were down sharply after concern spread regarding Greece’s ability to meet its debt obligations and Germany’s economy edged lower. The German ZEW economic expectations index missed estimates (for a decline of -10) and fell -15.7 in November which was worse than October’s already low reading of -11.5. Germany is the strongest economy in Europe and any weakness from them bodes poorly for the Eurozone’s ability to get out of its recession and return to growth. In other news, Christine Lagarde, Managing Director of the IMF and Jean-Claude Juncker, Chair of the Eurogroup, disagreed publicly over the deadline for Greece to lower its debt levels.
Stocks fell hard on Wednesday after President Obama held his first press conference since the election and made it clear that he wants to resolve the fiscal cliff but I felt there was not enough “urgency” in his stance. That said, I do feel as we get closer to the deadline D.C. will put together a last minute solution of some kind. Until then, uncertainty reigns supreme. October retail sales fell by -0.3% which just missed the Street’s estimate for -0.2% decline. The producer price index slid by -0.2% which was lower than the Street’s estimate for a gain of 0.1%. This bodes well for anyone that is concerned about inflation. Finally, the FOMC released the minutes of their latest meeting which showed continued concern regarding US economic growth and the jobs market.
Thursday & Friday’s Action- Stocks Continue To Slide
Before Thursday’s open, the Labor Department said weekly initial jobless claims soared to 439k which was sharply higher than the Street’s expectation for 388k. The sharp increase was due to Superstorm Sandy. The Consumer price index rose by +0.1% which matched estimates. The Empire Manufacturing Survey fell to -5.2 in November which was slightly better than October’s reading of -6.2. The Philly Fed Factory index fell to -10.7 in November which missed estimates and was lower than October’s reading of 5.7. A report from Europe showed that the eurozone fell into a second recession in three years. Stocks ended higher on Friday as investors were hopeful that D.C. will resolve the Fiscal Cliff before the deadline.
Market Outlook- Downtrend:
From our perspective, the market is in a clear downtrend and has now entered correction territory as the major averages continue to fall. On October 9, we said “the rally was under pressure” and then said the “rally was over” on Oct 19. Since then, stocks have gone straight down and a lot of technical damage has occurred. We will turn more bullish once the major averages confirm a new rally attempt and then trade back above their respective down trendlines and 50 DMA lines. As always, keep your losses small and never argue with the tape.
Market Action- Confirmed Rally; Week 26 Ends
It was encouraging to see the bulls show up and defend the major averages’ respective 50 DMA lines in November as this market proves resilient and simply refuses to go down. From our point of view, the market remains in a confirmed rally until those levels are breached. The tech-heavy Nasdaq composite and small-cap Russell 2000 indexes continue to lead evidenced by their shallow correction and strong recovery. However, it is important to note that stocks are a bit extended here and a pullback of some sort (back to the 50 DMA lines) would do wonders to restore the health of this bull market. If you are looking for specific high ranked ideas, please contact us for more information.
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Market Outlook- Market In A Correction:
From our point of view, the market is back in a correction now that all the major averages closed below their respective 50 DMA lines and important upward trendlines. Since the beginning of May, we have urged our clients and readers to be extremely cautious as the major averages and a host of commodities began selling off.
For those of you that are interested, the S&P 500 hit a new 2011 high on May 2, 2011. Two days later, on Wednesday, May 4, 2011, we turned cautious and said “The Rally Was Under Pressure” (read here). Then on Monday, 5.23.11, we changed our outlook to “Market In A Correction” (read here). On Monday June 6, 2011 we pointed out that the S&P 500 violated its 9-month upward trendline (read here) and reiterated our cautious stance. We have received a lot of “thank you” emails for being “spot on” and our cautious approach. We are humbled by your presence and very thankful for your continued support. Looking forward, the next level of resistance for the major averages is their respective 50 DMA lines then their 2011 highs. The next level of support is their longer term 200 DMA lines. If you are looking for specific help navigating this market, please contact us for more information.
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