All Asset Classes Fall; Dollar Rallies

Tuesday, October 19, 2010
Stock Market Commentary:

Stocks, commodities and a slew of other dollar denominated assets fell sharply on Tuesday after China raised rates and the latest round of economic and earnings data was released. Tuesday marked the 23rd anniversary for one of the largest declines in the history of the stock market. The Dow plunged -22% on October 19, 1987. Heretofore, volume patterns remain healthy as the major averages continue their 8-week rally. However, it is important to note that there have been an ominous number of distribution days that have emerged in the popular indexes which suggests caution. On average, market internals remain healthy evidenced by an upward sloping Advance/Decline line and the fact that new 52-week highs continue to easily outnumber new 52-week lows on both exchanges.

China Raises Rates & Earnings Fail To Impress:

Overnight, China’s central bank unexpectedly raised rates for the first time since 2007. China’s central bank raised rates to “stay ahead of the inflation curve.” The move sent the USD higher and a slew of stocks and commodities lower. In the US, housing unexpectedly rose to a five-month high which was a net positive for the ailing housing market. Earnings failed to impress investors as a slew of high-profile companies got smacked after releasing their latest quarterly data. Apple Inc. (AAPL), IBM, Bank of America (BAC), VMWare (VMW) were among few stocks that got smacked after releasing their latest quarterly numbers. Goldman Sachs (GS) and Coca Cola Company (KO) opened higher after earnings topped estimates.

Market Action- Confirmed Rally Week 8:

Heretofore, the action since this rally was confirmed on the September 1, 2010 follow-through day (FTD) has been strong but the market appears to be placing an interim top here as the major averages consolidate their recent move. The S&P 500 sliced below its two month upward trendline (shown above) which is not a healthy sign. The next level of support for the major averages is their September highs, then their respective 200-day moving average (DMA) lines while the next level of resistance is their respective April highs. We have enjoyed large gains since the September 1st FTD and for the first time, the tape is getting sloppy.  Trade accordingly.

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