Stocks and a slew of other “riskon” assets bounced from deeply oversold levels as hope spread that another round of global monetary easing will curb the economic slowdown across the globe. In early May, all the major averages sliced below their respective 50 DMA lines which prompted us to label this market “in a correction.” For the past few weeks, we have written about the importance of being defensive especially because the action in the major averages and a slew of leading stocks deteriorated. After the sharp fall, the bulls showed up and are doing their best to defend the longer term 200 DMA lines for the major averages. If that level is “broken” on a closing basis- then we have to expect another leg lower to begin.
Stocks rallied on Monday erasing earlier losses and marked Day 1 of a new rally attempt. Stocks looked passed a lackluster non-manufacturing PMI reading from China and were hopeful that the EU crisis was not deteriorating further. The CRB Commodity Index managed to snap a four day losing streak which also helped stocks rally. The euro, which is a great barometer for “riskon” assets, also rallied from deeply oversold levels which paved the way for a “riskon” day.
Stocks rallied on Tuesday after the latest round of economic data was mixed. European retail sales slid but non-manufacturing PMI improved marginally. Finance ministers from the G7 held an emergency teleconference but failed to come up with any ground breaking solutions. The latest ISM Services Index rose to 53.7 in May from 53.5 in April. Moody’s one of the popular rating agencies, slashed the ratings on several European banks.
Stocks extended their gains on Wednesday after the ECB held rates steady at 1% and optimism spread. The ECB held its key interest rate unchanged at 1% which matched expectations. ECB President Mario Draghi said the central bank will do its best to curb inflation but added that inflation pressures remain subdued. Draghi also said the ECB expects inflation should remain above 2% for the rest of 2012 and then fall to 1-2% in 2013.
Thursday & Friday’s Action- Stocks Slide As Enthusiasm Wanes:
Before Thursday’s open, China lowered their interest rates by 25 basis points to 6.31% to help boost their “sagging economy.” The PBC move was not expected and helped send a slew of risk assets higher. Janet Yellen, the vice chair of the Fed, gave a speech in Boston where she made a case for another round of monetary easing to protect and stimulate the US economy from the impact of the euro zone debt crisis. After the open, Bernanke testified before the Congressional Joint Economic Committee and reiterated his recent stance regarding continued “downside” risks to the economy and capital markets. In European news, Spain has not yet requested assistance from the ECB and has resisted being placed under international supervision. However, Reuters reported that both German and European Union officials are urgently searching for solutions to their onerous debt problems. Stocks sold off in the final hour after the U.S. Fed boosted capital requirements for several of the country’s largest banks. Stocks rallied on Friday as enthusiasm regarding the global economy improved.
Stocks Fall As Earnings Season Begins Stocks fell hard last week as earnings season officially began. It was a volatile and important week because the Nasdaq 100 hit a fresh record high on Monday, then sellers showed up and sent stocks lower for the rest of the week. On Monday, the Nasdaq 100 jumped to a…
It is important to note that the major averages have been steadily rallying since early February and a pullback of some sort should be expected. Tuesday marked the latest distribution day since the rally was confirmed on the March 1, 2010 follow-through day (FTD). According to the paper, there are 6 distribution days for the NYSE, 5 for the S&P 500, 4 for the Dow, and 3 for the Nasdaq in recent weeks. This puts some pressure on this 9-week rally, but has yet to cause any technical damage. The fact that the market continues to shrug off any and all negative data bodes very well for this 13-month bull market.
The NYSE composite closed below its respective 200 DMA line for the second straight session which is not a healthy sign. Furthermore, the S&P 500 and the Nasdaq composite undercut last Monday’s lows which means the day count has been reset for those indexes. However, the Dow Jones Industrial Average has yet to violate last Monday’s low which means that it just finished Day 6 of its current rally attempt and the window for a proper FTD remains open (until 5.10.10’s low of 10,386 is breached). What does all this mean for investors? Simple, the market is in a correction which reiterates the importance of adopting a defense stance until a new rally is confirmed. Trade accordingly.
The market is currently in a correction which, according to historical precedent, suggests 3 out of 4 stocks will follow the market lower until a new follow-through day emerges. That said, taking the appropriate action on a case-by-case basis with your stocks prompts investors to raise cash when any holdings start getting in trouble. It is also important to note that the major averages have experienced multiple “corrections” since the March 2009 lows and each one has been mild at best (less than a -10% decline from the recent high). Therefore, it will be very interesting to see how low this correction goes before the bulls show up and defend support. Additionally, it is important to note that the market can go much lower (or higher) than anyone thinks; so it is of the utmost importance to filter out the “noise” and carefully analyze price and volume action of the major average for the best read on the health of the market.
Market Action- Rally Under Pressure
The current rally which began with the Thursday, March 24, 2011 FTD is now under pressure as the Nasdaq 100 sliced below its respective 50 DMA lines. Remaining objective, it is bullish to see the other popular averages all trading above their respective 50 DMA lines. However, if that important level is breached, then lower, not higher prices, likely lie ahead. If you are looking for specific help navigating this market, please contact us for more information.
Have you seen the “Wise Money Library”?
Now, All In One Place, A Collection Of Strategies, Techniques and
Resources That Professional Traders and Investors Use
Have a Look: www.WiseMoneyLibrary.com
Market Action- Market In A Correction; 28-Week Rally Ends
All the major averages sliced below their respective 50 DMA lines on Thursday, March 10, 2011. Thursday, March 17, 2011 marked day 1 of a new rally attempt which means that the earliest a possible follow-through day (FTD) could emerge would be Tuesday, as long as Thursday’s lows are not breached. That said, the window is now open for a new FTD to emerge which will confirm the current rally attempt. However, if Thursday’s lows are breached, then the day count will be reset and odds will favor lower prices, not higher, will follow. It is important to note that the recent ominous action reiterates the importance of raising cash and playing strong defense until a new FTD emerges. If you are looking for specific help navigating this market, please contact us for more information.
Don’t Miss Out!
Have You Seen How Our New Site Can Help You!
Visit: www.SarhanCapital.com Today!
