Friday, December 23, 2011
Stock Market Commentary:

Stocks ended the week higher after the ECB lent nearly 500B euro’s to troubled European banks to help prevent a credit crunch and the latest round of U.S. economic data topped estimates. From our point of view, Friday marked Day 4 of the current rally attempt which means the window is now open for a new follow-through day to emerge (as long as Tuesday’s (12/20) lows are not breached). It was encouraging to see the benchmark S&P 500 index positively reverse (open lower but close higher) for the week which is normally a bullish sign. It was also important to see the S&P 500 close above its 200 DMA line and in positive territory for the year.

Monday-Wednesday’s Action: Stocks Rally After ECB Prevents Another Credit Crunch

On Monday, stocks and a slew of commodities fell after North Korean leader Kim Jong il passed away from a heart attack. The North Korean state media reported that he suffered the heart attack while on a previously scheduled train trip. Meanwhile, the President of the European Central Bank (ECB) Mario Draghi gave a speech in which he failed to offer any new bazooka type solutions to the ongoing debt crisis and warned of a possible breakup. On Tuesday, stocks and a slew of commodities rallied which helped alleviate their deeply oversold levels. A slew of housing stocks rallied after housing starts jumped in November. Housing starts jumped to an annualized rate of 685,000 units last month which easily topped the Street’s expectation of 627,000 units. November’s reading also topped October’s reading of 627,000 units. Separately, building permits rose to a pace of 681,000which also topped estimates and the prior month’s rate of 644,000.
On Wednesday, stocks ended mixed after a host of European banks borrowed nearly 500 billion euros from the ECB at very low rates. The ECB lent European banks 490 billion euros in three-year loans to help alleviate a possible credit crunch from developing. In economic news, the National Association of Realtors said U.S. home sales rose 4% to an annualized rate of 4.42 million. This just missed the Street’s estimates for 5.05 million.

Thursday & Friday’s Action: Italy Approves Austerity Plan; Investors Digest A Slew of Economic Data

On Thursday, stocks were quiet after Italy’s senate approved its much needed austerity plan and investors digested a slew of economic data. The Labor Department said initial jobless claims totaled 364,000 last week, which is much lower than the Street’s estimate of 380,000 and bodes well for the ailing jobs market. Third quarter GDP was revised down to 1.8% which is lower than the 2.0%posted in Q2. Elsewhere, The University of Michigan said U.S. consumer sentiment topped estimates and rose to 69.9 in December. November leading indicators rose +0.5% which topped the +0.3% expectation. Meanwhile, home prices fell -2.8% which is not ideal for the housing market. Economic data was less than stellar on Friday which dampened the week’s gains. Consumer spending and personal income rose +0.1% last month which missed estimates. Meanwhile, durable goods, goods that are meant to last more than 3 years, topped estimates and rose +3.8% in November. Finally, new home sales grew by +1.6% in November to a 315,000 annual unit rate. The report also showed that the median price slid -3.8% in the month to $214,100 which is –2.5% lower than last year’s level.

Market Outlook- In A Correction

The major averages are back in positive territory for the year which is a healthy sign. We find it very disconcerting to see other (leading) risk assets flirt with fresh 2011 lows in recent weeks/days. China’s Shanghai Composite (normally a leading risk on/off indicator) has fallen below its October low and hit a new 2.5 year low. The euro, which is strongly correlated to U.S. stocks and other risk assets also took out its October low on Tuesday (12/13) which is not ideal. Meanwhile, Gold sliced below its longer term 200 DMA line on on Wednesday (12/14) for the first time since August 2008 (1-month before Lehman failed) and remains below that critical level. Other risk assets such as Oil, Silver, Copper, etc are also under pressure which suggests the global risk off trade is getting stronger.  As an easy reference point, if the benchmark S&P 500 would simply fall to its Oct low, that would be 1074! Sometimes, caution is king.
What we have seen from the October 4, 2011 low was simply an over sold bounce into a logical area of resistance (200 DMA line). Now that the 200 DMA line was taken out it will be important to see how long the market can stay above this important level. If you are looking for specific help navigating this market, feel free to contact us for more information. That’s what we are here for!