Stocks Negatively Reverse; End Week Lower

SPX- New Trading Range Has Formed 12.17.12Friday, December 14, 2012
Stock Market Commentary:

Friday marked day 20 of the current rally attempt (that began on Friday, November 16, 2012- after politicians hinted that a deal would get done for the fiscal cliff). Over the past 20 sessions, the market bounced from November’s low (SPX ~1343) to November’s high (SPX ~1435), or a +7% rally.  At this point, those parameters define our new trading range. Additionally, the next move wins – either below support or above resistance. If November’s lows (SPX 1434.27) 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 and the S&P 500 closes above resistance on heavy volume. Keep in mind that the path of least resistance is down until the major averages confirm their latest rally attempt and close above resistance and then their downward trendlines.

Monday-Wednesday’s Action: Stocks Fail Near Last Month’s High:

Stocks ended higher on Monday on very light volume as investors continue to watch D.C. play political football with the fiscal cliff. It was encouraging to see the benchmark S&P 500 close just above its 50 DMA line for the first time since 10/22/12. Technically, the next level of resistance is last month’s high just under 1435. Most of Monday’s news came from overseas. Japan’s economy is officially in a recession as the country continues to struggle. Meanwhile, China said industrial production rose to the highest level since March which bodes well for their economy and the global economy by extension. In Europe, Italian Prime Minister Mario Monti said he plans to resign after the 2013 budget was approved. Mr. Monti was viewed as a critical player to help Italy move towards fiscal austerity.
Stocks rallied on Tuesday helping the S&P 500 and DJIA jump further above their respective 50 DMA lines as investors cheered a favorable report from Germany. Investor sentiment unexpectedly surged in Germany which bodes well for the ongoing (and fragile) economic recovery in Europe. In the U.S., the trade gap rose by +4.9% to $42.24 billion in October while wholesale inventories swelled +0.6% in October to a seasonally adjusted $497.13 billion.
Stocks opened higher but closed flat to lower on Wednesday after the last Fed meeting of 2012. Technically, the market failed to close above last month’s high which is not a healthy sign (e.g. churning). The FOMC held rates near zero and became the first central bank to tie rates to economic data points. The Fed said they will keep rates low until the unemployment rate falls below 6.5% and inflation tops 2.5%. I was quoted in saying: …some investors may be reading the Fed’s criteria as an either/or proposition, when in fact the central bank is signaling that both conditions must be met before it will begin to tighten policy.” Read here. In addition, the Fed added another $45 billion a month to “Operation Twist,” which is not an insignificant sum. This, coupled with their earlier commitment to buy $40 billion of mortgage-backed securities per month, adds another trillion dollars in 2013 and $4 trillion since the debt buying program began. The Fed lowered their 2012 GDP forecast to 1.8%, down from 2% earlier this year. In Bernanke’s post-meeting press conference he said that asset purchases were expected to continue until the economy improved substantially.

Thursday & Friday’s Action: Stocks Negatively Reverse on The Week

Stocks fell on Thursday as investors digested a slew of economic data and House Speaker John Boehner said President Obama was not serious about cutting spending, and that the White House is ready to go over the cliff. Meanwhile, retail sales rose by +0.3% in November which fell short of the Street’s expectations for a gain of +0.4%. Weekly jobless claims topped estimates, falling to 372k, lower than the 375k forecast. Overall producer prices slid by -0.8% in November which is greater than the Street’s estimate for a decline of -0.5%. Our hearts and prayers go out to everyone in CT who had to deal with this senseless and inhumane monstrosity. Stocks slid on Friday as Apple Inc. (AAPL) led the way lower and is currently retesting last month’s low. If Apple breaks, and closes below, 505 then another leg lower should commence. We mentioned this before, this is a classic case of a leading stock becoming a laggard. We have discussed this transition in our work many times, especially in recent years (few examples: CMG, NFLX, GMCR, FOSL, among others). Remember, we like to date our stocks, not marry them. Further, the longer the stock stays below its moving averages, the weaker it gets. A new buy signal will be triggered if/when it manages to break and close above its 600 (200 DMA line). Until then, the path of least resistance is lower.

Market Outlook: Downtrend

From our perspective, the market is back in a downtrend until the major averages break and close above resistance.  It is important to note that the S&P 500 and Nasdaq composite both closed below their 50 DMA lines on Friday, leaving just the DJIA slightly above its 50 DMA line. To further clarify an important point, the fact that the major averages failed to close above last month’s high is why we are placing more importance on that level, than the 50 DMA line. Furthermore, the fact that Apple is getting smacked and retesting last month’s low bodes poorly for the market. It is extremely important to be flexible in your approach and change when the facts change (Keynes). For those of you that are new to our work, 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 resistance. As always, keep your losses small and never argue with the tape.

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