Friday, February 5, 2010
Market Commentary:

Stocks got smacked for the fourth consecutive week as the dollar rallied and fears spread that the economic recovery may slow. During that period, volume patterns have turned bearish on the NYSE and Nasdaq exchange which suggests large institutions are aggressively selling stocks. Decliners steadily lead advancers which is another disconcerting sign.  It is also worrisome to see the number of new 52-week highs continue to shrink as the number of new lows continues to expand.

Monday & Tuesday:

Stocks rallied on Monday continuing the recent string of a strong start to the week before the bears show up and send stocks lower by Friday. Stocks rallied on strong manufacturing reports from the US, Europe, and China. The Institute for Supply Management said that US manufacturing enjoyed its largest gain since August 2004 which was a welcomed sign. On Tuesday, stocks and commodities rallied as the dollar fell after healthy news from the ailing housing front was released and the Australian central bank unexpectedly left interest rates steady.

Wednesday- Friday:

Stocks ended mixed on Wednesday, after the ADP said US employers cut -22,000 jobs last month which matched forecasts and the ISM said its non manufacturing index (a.k.a service-index) rose to 50.5, which signaled growth but trailed estimates. Readings above 50 suggest growth while reading below 50 indicate contraction. Even though the number topped 50, it trailed estimates which led many to question the health of the recovery.

Thursday- Rally Attempt Ends:

The three day rally attempt abruptly ended on Thursday when all of the major averages took out Monday’s lows on heavy volume. Both stocks and commodities got smacked as the dollar rallied after concern spread that the global economic recovery may slow. Before Thursday’s opening bell, the Labor Department reported that US jobless claims unexpectedly rose last week and concern spread that growing sovereign debt may derail the recovery. The euro plunged to its lowest level since May 2009 as the dollar soared well above its longer term 200 day moving average line. Lackluster bond auctions in Portugal and Spain triggered the sell off and led many to question the underlying health of the European Union. In other news, the European Central Bank (ECB) held rates steady at a record low of 1%. ECB president Jean-Claude Trichet said he is “confident” that Greece is moving in the right direction as it tries to curb its ballooning deficit but did not address the broader concerns.

Friday:

Before Friday’s opening bell, the Labor Department said US employers slashed -22,000 jobs in January and issued its annual benchmark update. The latest data shows that since the recession began in 2007, the country shed a whopping -8.4 million jobs which topped the prior estimate of just over 7 million. On the earnings front, so far, over half of the companies in the S&P 500 have released their Q4 results and nearly 80% of those companies have topped estimates. Barring some unforeseen event, the S&P 500 will snap a record nine-quarter earnings slump as earnings are expected to have grown +76% in the last three months of 2009. However, the fact that the market and most leading stocks experienced sharp losses since earnings season began suggests large investors are clearly concerned.

Market Action: In A Correction

Looking at the market, Friday marked day 1 of a new rally attempt which means that as long as Friday’s lows are not breached, the earliest a possible follow-through day could emerge will be Wednesday. However, if Friday’s lows are taken out, then the day count will be reset and the chances for a steeper correction increase markedly 
It is also important to see how the major averages react to their respective 50-day moving average (DMA) lines which were support and are now resistance. Until they all close above that important level the technical damage remaining on the charts is a concern. So far, the market’s reaction has been tepid at best to the latest round of economic and earnings data. Remember that the recent series of distribution days coupled with the deleterious action in the major averages suggests large institutions are aggressively selling stocks. Disciplined investors will now wait for a new follow-through day to be produced before resuming any buying efforts. Until then, patience is paramount. Our readers know that our defensive stance is not new- we have been defensive since January 23, 2010!
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