Thursday, December 8, 2011
Stock Market Commentary:
Risk assets were fell on Thursday as investors across the globe digested a slew of data, two important central bank meetings, and are still waiting for another much anticipated EU Summit this weekend. From our point of view, the market confirmed its latest rally attempt on Wednesday, November 30, 2011 when all the major averages soared over +4% on monstrous volume in response to the global central banks coordinated efforts to flood the world with liquidity. There have been a few isolated instances in history where a new follow-through day (FTD) emerges on Day 3 which validates Wednesday’s healthy action. It is important to note that every major rally in history began with a FTD but every FTD does not lead to a new major rally. In addition, since 2008 the percentage of failed FTD’s has surged due in part to the massive volatility we have seen in the major averages.
ECB Cuts Rates by 0.25%, BOE Holds Rates Steady, Economic Data Mixed
Most of the important data and headlines were released before Thursday’s open. The big news came from the European Central Bank (ECB). In his second meeting as head of the ECB, Mr. Draghi lowered rates by –0.25% which was lower than the the Street’s estimate for -0.50%. Draghi also disappointed investors when he said that the ECB will not be buying bonds which basically means that the much hoped for “bazooka” to save Europe was not used and that European leaders will actually have to make serious headway at their summit which begins on Thursday. The Bank of England (BOE) was virtually a nonevent. Economic data in the U.S. topped estimates but all eyes remain on Europe as investors continue to look (and hope) for a speedy resolution to their debt woes. The Labor Department said jobless claims fell -23,000 last week to a seasonally-adjusted 381,000.which was the lowest reading in almost 9-months. Elsewhere, the Commerce Department said wholesale inventories increased by +1.6% in October which was the highest gain in 5-months and topped the Street’s forecast for a gain of +0.3%.
Market Outlook- Confirmed Rally
The benchmark S&P 500 (SPX) is back in negative territory for the year after failing to stay above resistance (near its respective 200 DMA line) over the past few sessions. However, the other major averages are positive for the year which bodes well for the risk on trade and suggests we might end this year in the black. For months, we have argued in this commentary that from our point of view, the current EU bailout plan- to use leverage & add more debt to a debt crisis- is foolish at best and does not address the broader issues (i.e. the other PIIGS countries are broke). Recently, others are beginning to take notice. However, our job is to trade on what we see happening, not on what we think will happen. We do this by gathering the facts, interpret how the markets react to the news and trade accordingly. 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. Our longstanding clients/readers know, we like to filter out the noise and focus on what matters most: market action. 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!