On average, stocks and other risk assets enjoyed healthy gains in the first quarter of 2012 as the U.S. economy continues to improve and EU debt woes have eased materially. For the quarter, the Nasdaq composite surged nearly 19%, the S&P 500 jumped nearly 12% and the Dow Jones Industrial Average rose 8%. From our point of view, the major averages confirmed their latest rally attempt on Tuesday 1.3.12 which was Day 9 of their current rally attempt. Since then, stocks have been enjoying a very strong uptrend. The benchmark S&P 500 paused near its 2011 high (~1370) before moving higher and that level should now become support. The next level of support would be the 50 DMA line, then a deeper 5-9% pullback. It is important to note that the bulls remain in control of this market as long as the benchmark S&P 500 stays above its 50 DMA line.

Monday-Wednesday’s Action: EU Debt Woes and Hurt Stocks

Before Monday’s open, Fed Chairman Bernanke gave a speech and made it clear that an “accommodative” policy (i.e. easy money from the Fed) is still needed to stimulate the ongoing economic recovery. He also said that the latest round of economic data suggests the job market is getting better but the underlying conditions remain far from normal. The Chicago Fed National Activity Index, which measures inflation and economic conditions in the Mid-West, slid to negative -0.9 in February from January’s revised plus 0.33 due to lower levels of production. In other news, the housing market continues to struggle as pending home sales fell -0.5% last month which missed the Street’s estimate for a +0.1% gain. Pending home sales measure how many contracts were signed in a given month. Stocks ended lower on Tuesday as investors digested the latest round of mixed economic data. The S&P Case/Shiller index was unchanged which beat the -0.2% decline the Street had expected. The report showed that prices for single-family homes were unchanged in January which bodes well for the ongoing recovery in the housing market. On a non-seasonally adjusted basis, prices fell by -0.8%. A separate report showed that consumer confidence in the U.S. fell in March to 70.2, from an upwardly revised 71.6 in February. This just missed the Street’s 70.3 expectation.
Stocks fell on Wednesday after fear spread regarding the EU debt crisis and a global economic slowdown. The Mortgage Bankers Association said weekly mortgage applications rose last week but refinancing demand slid for a 6th consecutive week as interest rates edged higher. Meanwhile, the Commerce Department said durable goods missed estimates and rose at +2.2% in February. Future business investment also missed forecasts. Separately, investors were concerned after Ben Bernanke told ABC News Tuesday evening that the economy is still not out of the woods yet which raised the odds for QE3. Bernanke’s main concern is that this recovery is a shallow version of the Great Depression. After the 1929 meltdown (similar to 2008) the economy and stock market briefly rebounded before relapsing (largely due to poor decisions from the Government regarding both fiscal and monetary policy) in the mid 1930′s. The only thing that saved the economy in the late 1930′s was World War II. Bernanke doesn’t want to make the same mistake.

Thursday & Friday’s Action: Stocks Shake Rebound From Mid-Week Sell Off:

Stocks ended mixed on Thursday, recovering from a weak open, after fear spread regarding the global economic recovery, fresh EU debt woes, and weaker than expected economic data from the U.S.. Two important economic reports missed estimates in the U.S. The Commerce Department said its final estimate for Q4 2011 GDP was unchanged at +3.0%. This was the strongest gain since Q2 of 2008 but missed the Street’s +3.2% estimate. Meanwhile, the Labor Department said weekly jobless claims fell by 5,000 to a seasonally adjusted +359,000 last week. Jobless claims fell to a four year low but missed the Street’s estimate of 350,000. Stocks rallied on Friday after Euro-Zone finance ministers said they would expand emergency lending measures to  €700B (or $1.06T) to help allay more EU debt woes.

Market Outlook- Confirmed Rally