Week In Review: Stocks Confirm New Rally

The major averages confirmed a new rally attempt and ended higher for the week as investors digested the latest round of earnings and economic data. However, this was the second consecutive week that volume, a critical component of institutional demand, receded as the major averages advanced. Normally, one would like to see volume expand as the market rallies and contract when the market declines. In terms of new leadership, it was encouraging to see new 52-week highs outnumber new 52-week lows on the NYSE and Nasdaq exchange.
On Monday, stocks scored a follow-through day (FTD) after the Group of 20 largest industrial nations agreed to maintain their economic stimulus package as the global economy continues to recover. It is important to note that this market remains very strong. On every rally since the initial lows in March 2009, each pullback has been less than -8% and the bulls have promptly showed up to quell the bearish pressure and send stocks higher. The latest correction began on October 28, 2009 and ended on November 9, 2009 when this rally-attempt was confirmed. To avoid any confusion, the official status of the market changed from “rally attempt” to “confirmed rally.” Now that the market is back in a confirmed rally, growth investors have a green light for buying stocks when they trigger fresh technical buy signals and break out of sound bases. The stock market remains strong as long as the US dollar continues to fall and the global economic stimulus package continues.
On Tuesday, stocks ended mixed as investors digested the latest round of economic data. The National Association of Realtors said that home prices fell in 8out of every 10 US cities last quarter. Sellers continue to lower prices to attract buyers which has caused the price of the average home to decline to$177,900 which is -11% below Q3 2008’s levels. Distressed sales, a.k.a. deeply discounted sales, made up 30% of all deals according to their data. The good news in the report was that home sales rose and two dozen cities saw home prices actually climb! Remember, the ideal scenario for the real-estate market to recover will be higher home prices coupled with more sales.
On Wednesday, stocks rallied and sent the benchmark S&P 500 Index to a fresh 2009 high. China reported that its industrial production surged thanks in part to strong demand. This bodes well for the global economic recovery and helps allay concern that the 8-month rally in global equities is exaggerated. Elsewhere, the Fed signaled they do not plan on raising rates any time soon. This also removed a ton of pressure on those that subscribe to the notion that the stock market’s 8-month advance was due to a massive government induced liquidity driven rally. The underlying notion is that banks are able to borrow money near record lows and then use that money however they may see fit.
On Thursday, the stock market and a slew of commodities sold off as the US dollar rallied. The US dollar rallied against 15 of 16 major currencies after the Federal Deficit soared to a new record of $176.4 billion  in October. Stocks sold off after Hewlett-Packard (HPQ) announced plans to acquire 3Com (COMS). 3Com surged a whopping +31% on the news and enjoyed its single largest advance since 2007 on the $2.7 billion deal. This helped send a slew of computer networking stocks higher.
Stocks shook off negative news regarding consumer sentiment and ended higher on Friday. So far, over 80%of S&P 500 companies that reported Q3 results have topped estimates which has helped the market hold up rather well considering that profits were negative for a record ninth consecutive quarter. What does all this mean for growth investors? Be patient and continue to watch for leading stocks to breakout of sound bases. Do not force a trade and let the market come to you; i.e. do not chase. It is also important to remain cognizant of what is working in this environment: mainly buying very liquid large cap leaders as they bounce off their 50-day moving average line or breakout of sound bases. Some of those leaders include: Apple Computer (AAPL), Amazon (AMZN), Priceline.com (PCLN), Google (GOOG), and Baidu Inc. (BIDU). The action in these names have served as a great proxy for the overall rally which began in March 2009. Jesse Livermore’s timeless advice is true once gain, “Follow The Leaders.”

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