Finally, stocks and other risk assets fell as fear spread that China’s red-hot economy would begin to slow. As we have been mentioning for weeks, the market is extended to the upside and we would not be surprised to see a nice pullback to shake out the weak/late hands. From our point of view, the major averages confirmed their latest rally attempt on Tuesday 1.3.12 which was Day 9 of their current rally attempt. Since then, stocks have been enjoying a very strong uptrend. The benchmark S&P 500 paused near its 2011 high (~1370) before moving higher. At this point, it would be perfectly normal and healthy to see a 5-9% pullback at any point to give the bulls a chance to consolidate the recent gain. That would bring the S&P 500 down to 1320-1280. It is important to note that the bulls remain in control of this market as long as the benchmark S&P 500 stays above its 50 DMA line.

China’s Economy Cools, Housing Starts Mixed:

Before Tuesday’s open, futures were down sharply due to renewed fear that China’s red-hot economy may begin to slow. Economic data was light in the U.S. but the news that did come out was mixed. The Commerce Department said housing starts fell -1.1% in February to a seasonally adjusted annual rate of 698,000 units, but building permits vaulted to their highest level in more than 3 years! The Street was looking for housing starts to be little at a 700,000-unit annual rate.

Market Outlook- Confirmed Rally