The major averages ended higher in November and, as of this writing, have placed a near term low on Friday, November 16, 2012 (Day 1 of current rally attempt) after politicians hinted that a deal would get done for the fiscal cliff. If November’s lows (SPX 1343) are taken out, then odds favor lower, not higher prices, will follow and this rally attempt will have failed. Additionally, a new rally will be confirmed when we see at least one of the major averages rally at least 1.4% on heavier volume than the prior session. Keep in mind that the path of least resistance is down until the major averages confirm their latest rally attempt and break above resistance (50 DMA line) and their downward trendlines. For those of you that are interested, Friday marked Day 10 of a New Rally Attempt which means that the window is now open for this rally attempt to be confirmed with a new follow-through day.
Monday-Wednesday’s Action: Fiscal Cliff Drama Dominates The Headlines
Stocks opened lower on Cyber Monday even though initial data suggested that Black Friday sales were slightly higher than last year. Amazon.com (AMZN) enjoyed the most traffic over the weekend which helped it capture a large block of the holiday shopping season. The National Retail Foundation said total spending over the Thanksgiving weekend rose to $59.1B which was 16% higher than last year’s total. Stocks fell in Europe after eurozone finance ministers met to discuss austerity measures for Greece. If the measures are met, Greece will receive the next tranche of the bailout on December 5, 2012.
Stocks fell on Tuesday after Senate Majority Leader Harry Reid said he is “disappointed with the little progress made” regarding the fiscal cliff debt talks. Investors reacted poorly to this news and a slew of stocks, particularly financials, fell on the news. Economic data was mixed, the closely followed S&P/Case-Shiller home price index rose for a 6th consecutive month and the Conference Board said consumer confidence jumped to the highest level in 4.5 years in November. Meanwhile, the Commerce Department said durable goods were flat in October.
Stocks opened lower but closed higher on Wednesday after politicians reiterated their desire to reach a deal on the Fiscal Cliff. The benchmark S&P 500 index bounced perfectly off its 200 DMA line (encouraging sign) and closed near its highs. Economic data was mixed. President Obama said he is hopeful that a deal will be reached before Christmas. The Federal Reserve released its October Beige Book, which showed modest growth in seven Districts. The report also showed two Districts reported stronger growth while Boston, New York, and Philadelphia saw weak performance. The weakness in New York and Philadelphia was due to Superstorm Sandy. New home sales disappointed investors. New homes sales came in a 368,000 annual rate which missed estimates by 19k.
Thursday & Friday’s Action: Fiscal Cliff Drama Continues
Stocks edged higher on Thursday after GDP rose 2.7% in Q3 which topped the initial estimate of 2.0%. Jobless claims fell to 393k which was near the estimate of 390k. Pending home sales jumped +5.2% even with the impact of Sandy which topped estimates for a gain of 1%. Pending home sales track sales of existing homes, not new homes, that have not yet closed (it normally takes 4-6 weeks for a pending contract to close). Stocks were quiet on Friday as investors digested the latest round of economic data. U.S. consumer spending fell -0.2% in October which marked the first decline sicne May. Personal incomes were flat which missed the Street’s estimate for a +02% gain. Sandy adversely affected the data. The Chicago Manufacturing index came in at 50.4 in November vs 49.9 in October. Overseas, Germany approved a bailout for Greece which helped the Euro rally.
Market Outlook: Downtrend
From our perspective, the market is in a clear downtrend and it is encouraging to see that the major averages are down less than 10% from their 2012 highs. On October 9, we said “the rally was under pressure” and then said the “rally was over” on Oct 19. Since then, stocks have gone straight down and a lot of technical damage has occurred. We will turn more bullish once the major averages confirm a new rally attempt and then trade back above their respective down trendlines and 50 DMA lines. As always, keep your losses small and never argue with the tape.