Friday, September 23, 2011
Stock Market Commentary:

Nearly every major capital market (equities, euro, crude oil, gold, copper, etc…etc..) were smacked in the wake of the Fed’s meeting. Nearly every day since mid-August, we told you that the major averages were simply rallying (on light volume) towards resistance (50 DMA line) and unless they broke above resistance, the sideways/range bound action would continue. Now, the major averages are simply testing support and unless support is violated (SPX 1101) then, by definition, we should expect this sideways action to continue.

Negative Divergence: Copper & Overseas Markets Hit Fresh 2011 Lows!

We also discussed the negative divergence we began to see in the middle of September between U.S. equity markets and other capital markets. We find it disconcerting to see that Copper, several European stock markets, and crude oil all fell to fresh 2011 lows as U.S. equity markets were bouncing towards resistance.
It is also important to note that since 2008, Copper, crude oil, and several European and Emerging stock markets have moved before U.S. markets. Copper, China, & India’s stock markets all bottomed in Q4 2008 and U.S. markets bottomed in March 2009. Therefore, the fact that these markets also topped in 2011 before the U.S. markets and continue in many cases to hit fresh 2011 lows bodes poorly for U.S. markets. Therefore, staying on top of these subtle relationships is extremely important to successfully navigating our markets. At this point, the current rally is under pressure evidenced by several distribution days (heavy volume declines) since the latest FTD. It is important to note that even with the latest FTD, the major averages are still trading below several key technical levels which means this rally may fade if the bears show up and quell the bulls’ efforts.

Monday-Wednesday’s Action: Greek Default Likely & Fed Spooks Global Economy

On Monday, stocks snapped their longest winning streak since July after fresh fear regarding a Greek default resurfaced over the weekend. One of the big reasons behind this week’s massive global sell off was that the question regarding Greec’s default. Heretofore, we were concerned “if” the country would default, now the question is “when.”
After Monday’s close, S&P rating agency downgraded Italy’s credit rating by one notch to A/A-1 and kept its negative outlook. On Tuesday, the IMF said the global economy will grow +4% in 2011 and 2012. This was lower than their prior forecast in June of +4.3% in 2011 and of +4.5% in 2012. The U.S. growth projection was lowered to +1.5% in 2011 from +2.5% in June. Separately, the Commerce Department said U.S. housing starts fell -5% to a three-month low of 571,000 annual rate in August.
Stocks were pounded on Wednesday after the Fed announced operation “twist” and said several large U.S. banks’ credit rating were downgraded by Moody’s. Elsewhere, the National Association of Realtors said existing home sales jumped +7.7% month over month to an annual rate of 5.03 million units. The median home price slid by -5.1% from the same period last year.

Thursday & Friday’s Action: China’s PMI Falls Suggesting Global Economy Will Slow

Nearly every capital market across the world was pounded on Thursday after China said its factory sector contracted for a third consecutive month and concern spread regarding a global double dip recession. Stocks were relatively quiet on Friday as investors digested the week’s massive sell off. On a positive note, the major U.S. averages are simply testing support (2011 lows) and as long as support holds, this range-bound action will likely continue.

Market Outlook- Rally Under Pressure:

The major averages confirmed their latest rally attempt on Tuesday, August 23, 2011 which was the 11th day of their latest rally attempt. It is important to note that all major rallies in history began with a FTD however not every FTD leads to a new rally (i.e. several FTDs fail). In addition, it is important to note that the major averages still are under pressure as they are all trading below their longer and shorter term moving averages (50 and 200 DMA lines) and are all still negative year-to-date. Our longstanding clients/readers know, we like to filter out the noise and focus on what matters most: market action. This rally will fail if/when several distribution days emerge or August’s lows are breached. Until then, the bulls deserve the benefit of the doubt. If you are looking for specific help navigating this market, please contact us for more information.