Friday, August 19, 2011
Stock Market Commentary:
Stocks ended lower for the fourth consecutive week as fear spread that the global economy is slowing and inflation is accelerating throughout much of the developed world. In the U.S., the window remains open for a new FTD to emerge which will confirm the current rally attempt. Technically, as long as last Tuesday’s (8.16.11) lows hold. However, there is no rush to buy ahead of a FTD because doing so increases the odds of failure. To be clear, the bears remain in control of this market until the major averages close above their longer term 200 DMA lines or a new FTD emerges. A new follow-through day will emerge when at least one of the major averages rallies at least +1.8% on higher volume than the prior session. Until that happens, this is just a normal “oversold” bounce. Near term resistance remains the 200 DMA line and near term support remains the 2011 lows.
Monday-Wednesday’s Action: Oversold Bounce
Stocks rallied enjoyed large gains on Monday after some $19 billion of new M&A news was announced. However, volume, a critical component of institutional sponsorship was very light. One of the most popular deals was Google’s (GOOG) announcement that they planned to acquire Motorola Mobility Holdings (MMI) for $12.5 billion. On Tuesday stocks slid after the Commerce Department reported that housing starts slid -1.5% to a seasonally adjusted annual rate of 604,000 units. A separate report showed U.S. industrial output rose +0.9% last month, more than double June’s +0.4% and the fastest gain in 7 months. In Europe, France and Germany ruled out a new Euro Bond which was designed to help alleviate Europe’s onerous debt burdens but agreed to several other factors aimed at restoring confidence in the troubled continent. The latest GDP data out of Europe missed estimates.
Stocks ended higher on Wednesday as investors digested the latest round of economic data. The Mortgage Bankers Association (MBA) said mortgage applications slid by a disturbingly large -9.1%. Separately, the Labor Department said its produce price index (PPI) rose +0.2% despite lower energy prices. Core prices, which exclude food and energy, rose +0.4% which was the largest increase since January and rose+0.3% in June. Since the March 2009 bottom, inflation has remained largely at bay which has helped alleviate pressure on the Federal Reserve to raise rates. However, if inflation swells over the next few quarters than the Fed may be put in a precarious situation; raise rates to curb inflation or leave rates low to stimulate the stale economy?