Tuesday 12.08.09

Market Commentary:

The major averages opened lower as the dollar strengthened for a fifth consecutive session. A slew of negative headlines were released on Tuesday which led many investors to question the ongoing economic recovery: German industrial production unexpectedly fell, several credit-rating companies highlighted the risk of huge government deficits, and Dubai World’s Nakheel PJSC said it lost $3.65 billion. Leadership among high-ranked growth stocks had dried up in recent weeks, so the expansion in new highs this week has been a welcome improvement. New 52-week highs solidly outnumbered new 52-week lows on the NYSE and on the Nasdaq exchange.

Ratings Downgrades:

The major averages gapped down at the open after several well-known rating agencies downgraded several nation’s credit. Moody’s Investors Service said deteriorating public finances in the U.S. and U.K. may “test the Aaa boundaries.” They also said that the U.S. and U.K. have “resilient” Aaa ratings while Canada, Germany and France’s ratings are “resistant.” Fitch Ratings, another well-known rating agency, cut Greece down to a BBB+ which is the third-lowest investment grade. Meanwhile, Standard & Poor’s put Greece’s A- rating on “watch” for a possible downgrade.

Economic News:

Overseas, Japan’s government supported 7.2 trillion yen ($81 billion) stimulus package to help their economic recovery. In Europe, German industrial output slid -1.8% in October led by a drop in production of energy and investment goods. This was lower than the average estimate for a +1% percent gain, according a Bloomberg.com. Elsewhere, Nakheel, the Dubai World-owned property developer seeking to renegotiate its debt, said that it had a first-half loss of 13.4 billion dirhams ($3.65 billion) due to lower revenue. A spokesman for Dubai World, Nakheel’s parent, declined to comment on the write down.

U.S. Dollar & Commodities:

The weaker-than-expected economic news from Germany coupled with the multi billion dollar loss from Nakheel sent the US dollar higher and a host of dollar denominated assets lower. Crude oil slid for a fifth consecutive day and gold continued falling from its all-time high last Thursday.

Price & Volume:

The U.S. stock market remains resilient as it simply refuses to go down. Longstanding readers of this column know that we prefer to focus more on how the market reacts to the news than the news itself. That said, the bears had all the possible ammunition to send stocks plunging on Tuesday and the fact that they did not (or could not), speaks volumes. In addition, the market remains strong since it has barely “corrected” and continues consolidating its recent move just below resistance. Looking forward, the bulls deserve the bullish benefit of the doubt until one of the major averages trades, and closes, below its respective 50 day moving average line.