Friday, December 3, 2010
Stock Market Commentary:
Stocks ended higher during the first week of December after EU debt woes eased and a slew of stronger than expected economic news was released. The market is still in a correction according to outside sources which means a new proper FTD needs to emerge in order to confirm a new rally. From our standpoint, the rally that began on September 1, 2010 is still intact. But that is a story for another day.
Monday & Tuesday’s Action: Euro Smacked & Stocks Test 50 DMA Line
On Monday, stocks fell after the euro plunged to a fresh multi month low and traded below its 200 DMA line as concern spread that EU’s debt woes will spread. It is important to note that Hungary’s benchmark stock market index plunged more than -20% from its 2010 peak which is the common definition of  a bear market. Their bonds also sank as concern spread that Europe’s debt crisis is spreading east. Hungary was the first European Union nation to receive an International Monetary Fund bailout during the 2008 global economic crisis after the government’s budget deficit exploded. The US dollar rallied on the news which sent a host of dollar denominated assets (i.e. stocks and commodities) lower.
On Tuesday, stocks slid after the euro plunged to a fresh multi month low and traded below its 200 DMA line as concern spread that EU’s debt woes will spread. The US dollar rallied on the news which sent a host of dollar denominated assets (i.e. stocks and commodities) lower for a second straight day. Overnight, China’s Shanghai Index shed -3.1% and tumbled to a fresh 7-week low after a shortfall of cash in the domestic money market caused a liquidity squeeze. It is also important to note that the Shanghai index violated its 50 DMA line in mid-November which bodes poorly for other global equity markets. Before Tuesday’s open, the Case-Shiller Home price index fell faster than expected. Elsewhere, the ISM released its Chicago based business barometer which topped estimates and rose to +62.5 in November. This was the highest reading since April and topped October’s reading of 60.6. Finally, consumer confidence jumped to the highest level since June which bodes well for the holiday shopping season.

Wednesday- Friday’s Action: ECB Buys Gov’t Bonds; Euro & Stocks Surge!

On Wednesday, Jean Claude Trichet, head of the European Central Bank (ECB), said the central bank was ready to step in and buy distressed assets to help curb EU contagion woes. This helped ease concern that the ominous debt woes will spread and that the euro will breakup. The euro rallied on the news which sent stock markets around the world higher. In other news, China said that mfg jumped to a 7-month high which bodes well for the global economic recovery. Before Wednesday’s open, ADP, the country’s large private payrolls company, said private jobs vaulted +93,000 last month which easily topped estimates and September’s reading was revised higher. Elsewhere, the US ISM mfg index rose for the 16th consecutive month and was little changed at 56.6.
On Thursday, the European Central Bank (ECB) said that it delayed its withdrawal of emergency aid and liquidity and bought more government bonds to help allay contagion woes. ECB President Jean-Claude Trichet said he plans to fight “acute” financial market tensions and made it clear that the ECB would actively try to stem the ongoing debt crisis. In the US, stocks rallied after retail sales and housing data suggested the current recovery was on track. On Friday, stocks opened lower after the Labor Department said employers added +39,000 new jobs last month, which fell short of the Street’s triple digit estimates. The report also showed that the unemployment rate jumped to +9.8% which was not a healthy sign. Instead of selling off, the stock market remains resilient as it simply refuses to fall.
Market Action- Correction Week 4
It is encouraging to see the bulls show up and defend the 50 DMA lines for the major averages. Wednesday marked Day 1 of a new rally attempt for the Dow Jones Industrial Average and the benchmark S&P 500 which means the earliest a possible FTD could emerge for those indices is Monday. Meanwhile, the tech-heavy Nasdaq composite and small-cap Russell 2000 indexes marked Day 12 of their respective rally attempts which means the window remains open for either of those two indices to score a proper FTD. Trade accordingly.

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