Friday, August 12, 2011
Stock Market Commentary:
The second week of August was plagued with an enormous amount of volatility. Tuesday marked Day 1 of a new rally attempt which means that as long as Tuesday’s lows are not breached, the earliest a possible follow-through day (FTD) can emerge will be Friday. However, if Tuesday’s lows are breached, then all bullish bets are off the table and the day count will be reset. It is also important to note that some of the stock market’s largest moves (both “up” and “down”) occur during corrections/bear markets. Since we are clearly in the middle of a severe correction (or nascent stages of a bear market) it is imperative to play strong defense until a new rally is confirmed. It is also important to be on the look out for very attractive rallies which are also known as “sucker rallies” because they suck you in and then resume another leg lower.
Technically, as long as Tuesday’s lows hold- there is a strong chance that the markets may be forming a short-term low. However, there is no rush to buy ahead of a FTD because doing so increases the odds of failure. To be clear, the bears remain in control of this market until the major averages close above their longer term 200 DMA lines or a new FTD emerges.
Monday-Wednesday’s Action: Violent Volatility, But Week’s Lows Were Not Breached
On Monday, stocks were smacked sending the DJIA plunging 634 points as investors digested the S&P downgrade of U.S. credit from AAA to AA+. Over the weekend, stocks were smacked across the globe as investors shunned “risk assets” and moved into so-called safe havens (i.e. gold and bonds).
Stocks surged on Tuesday sending the DJIA up 430 points after the Fed’s much anticipated meeting. This was the first official Fed meeting since the Standard & Poor’s downgraded the U.S.’ AAA credit rating to AA+ on Friday 8/5/11. As expected, the Federal Reserve decided to hold rates steady for at least the middle of 2013 (2 yrs) and left the door open for further action, if conditions continue to deteriorate. In their post meeting commentary, the FOMC made it abundantly clear that the economy will remain weak for the next two years which bodes poorly for the ongoing and fragile economic recovery. However, stocks rallied sharply into the close and as our longstanding readers know, we tend to focus on how the markets react to the news. Tuesday’s reaction was positive.
On Wednesday, stocks were clobbered, sending the DJIA down 519 points and gave back most of Tuesday’s gains, as fear spread that the European debt crisis would worsen. Costs to protect the government debt of Greece. Italy, France, and Spain surged which illustrates how weak confidence is for those nations. In the U.S., the economic news was very light. Inventory growth in the wholesale sector slowed in June to +0.6% which was the lowest rate of 2011 and lower than the prior month’s reading of +1.8%.
Thursday & Friday’s Action- New Rally Confirmed:
On Thursday, DJIA bounced back 423 points after false rumors spread in Europe that a major French bank may become the next Lehman brothers. Rumors spread that Société Générale was on the brink of failure which sparked fear that France may lose its AAA credit rating. The French bank’s CEO went on the offensive defending his bank, denied the rumors, and highlighted its financial strength. Rumors also spread that France and Italy may impose a temporary ban on short selling. U.S. stocks opened higher after the Labor Department said weekly jobless claims slid -7,000 to 395,000, in the first week of August. That was the lowest number since early April, below the Street’s forecast for 405,000, and below the closely followed 400,000 level.
Before Friday’s open, retail sales rose +0.5% in July, following a +0.3% rise in June. France’s GDP was flat in the Q2 compared with a small gain of +0.9% in Q1. U.S. consumer sentiment plunged in early August to the lowest level in more than 30 years which bodes poorly for the ongoing recovery. Since consumer spending currently comprises nearly 2/3 of the U.S. economy – therefore, plunging consumer confidence is not ideal.
Market Outlook- Market In A Correction
The latest action in the major averages suggests the market is back in a correction as all the major averages remain below key technical levels. Our longstanding clients/readers know, we like to filter out the noise and focus on what matters most: market action. That said, the recent action suggests caution is paramount at this stage until all the major averages rally back towards their respective 200 DMA lines. If you are looking for specific help navigating this market, please contact us for more information.
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