Friday, October 19, 2012
Stock Market Commentary:
The major averages ended mixed last week but ended near their lows (which is not a healthy sign for the bulls) as sellers showed up in the latter half of the week and sold shares. So far, this is nothing more than a normal pullback after a big run. The S&P 500 is less than -3% below its multi year high of 1474 and near its 50 DMA line. Normally, one would like to see the bulls show up and defend the 50 DMA lines for the major averages and leading stocks. The fact that all the major averages violated their respective 50 DMA lines coupled with lousy action in leading stocks will cause us to change the status of this rally from rally under pressure to market in a correction. Remember, over the next several weeks as we make our way through Q3 earnings season- it is very important to not only focus on the actual numbers but more importantly how stocks (and the major averages) react to the numbers.
Monday-Wednesday’s Action- Stocks Bounce off 50 DMA Line
Stocks opened higher on Monday helped by stronger than expected economic/earnings data and healthy comments from Europe. Overnight, China said its trade surplus widened to $27.7B which topped the Street’s estimate of $20B. China said exports rose which bodes well for the global economy. China released its PPI numbers which were not that bad. In Europe, EU Commissioner Olli Rehn said talks with Greece should by resolved by Mid-November and more relief may be provided to the heavily indebted nation. Mr. Rehn also said that Spain is open to a bailout request and is confident in Spain’s ability to reform its troubled economy. In the US, Citigroup (C) topped estimates and rallied even after Mr. Pandit, former CEO, unexpectedly stepped down.
Stocks opened higher on Tuesday after a string of stronger than expected economic and earnings data was released. Before Tuesday’s open, three Dow Components topped estimates and financial giant Goldman Sachs (GS) smashed numbers on both the top and bottom line. Economic data was positive, CPI matched estimates which eased pressure on the Fed to raise rates in the future to curb inflation. Industrial output rose to 0.4% in September which beat the Street’s estimate for a gain of 0.2%. The National Association of Home Builders Housing Market Index rose to 41 vs 40 in the prior month.
Stocks ended slightly higher on Wednesday, helping the DJIA enjoy a 4-day winning streak. The big positive was a very strong report from the housing market. Housing starts vaulted by 15% in September which was the fastest rate since 2008 according to the Commerce Department. This helped send shares of home builders surging to fresh multi-month highs and supports our bullish call that the housing market bottomed in Q4 2011. In other news, Moody’s, one of the popular rating agencies, held its credit rating unchanged for Spain.
Thursday & Friday’s Action- Stocks Slide On Soft Earnings Data
Stocks ended with small losses on Thursday after Google’s prematurely announced a surprisingly weak earnings report. Google earned $9.03 a share compared to $9.72 which is a decline of -7% vs Q3 2011. This was the first deceleration in the tech giant’s earnings since the 2008 crisis. So far, around 20% of S&P 500 firms have posted Q3 results and 65% have beat estimates while 20% have missed. Economic data was mixed, jobless claims rose by 46,000 to a seasonally adjusted 388,000 which is not ideal for the ailing jobs market. On a more positive note, leading indicators jumped in September to post their largest gain in seven months while the Philly Fed index rose in October. Friday marked the 25th Anniversary of the 1987 “Black Monday” Crash. The Dow Jones Industrial Average plunged a stunning -22.6% in one day- marking its largest single day decline in history. Stocks were smacked on Friday due to a series of weaker than expected earnings reports from a few influential companies.
Market Outlook- Market In A Correction:
From our perspective, the multi-month rally ended on Friday 10/19/12 when all the major averages traded below their respective 50 DMA lines and a slew of leading stocks broke down in heavy volume. On October 9, 2012 we noted that the market rally was under pressure and if the major averages violated their respective 50 DMA lines the market would enter correction territory. Normally, when this happens we begin to raise cash and adopt a more defensive stance. We will turn more bullish if/when all the major averages jump back above their respective 50 DMA lines. Until then caution is king. As always, keep your losses small and never argue with the tape.