Wednesday, December 21, 2011
Stock Market Commentary:
Stocks ended mixed on Wednesday after the ECB lent nearly half a trillion dollars to European banks at very low rates and the latest round of U.S. home sales missed estimates. From our point of view, the market is back in a correction as the latest follow-through day (FTD) failed after the benchmark S&P 500 sliced below its 50 DMA line. This is just another example of how erratic markets have been of late. The global macro picture is deteriorating which is not ideal for U.S. stocks. Remember our mantra: Remain flexible in your approach, always cut your losses, and never argue with the tape.
European Banks Borrow Money From ECB & U.S. Home Sales Miss Estimates
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.
Market Outlook- In A Correction
The benchmark S&P 500 (SPX), Russell 2000, and Nasdaq composite are all back in negative territory for the year which is not ideal. Meanwhile, the Dow Jones Industrial Average is up slightly for the year. 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). Looking forward, this sideways action should continue until either support (1074) or resistance (200 DMA line) is breached. Therefore, we have to expect this sloppy wide-and-loose action to continue until the market closes above its longer term 200 DMA line. 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!