Wednesday, October 5, 2011 9: 19 am EDT
DJIA: 10,808.71 S&P 500: 1123.95
POW ! Out of nowhere, we get a one-day reversal on the upside, so typical on the heels of downside breakouts.
What gives ? Wasn’t the market headed for the dumpster ?
Institutions often use the increased volume accompanying breakouts from key levels like the one yesterday to accumulate targeted stocks. It enables them to build positions without pushing prices up.
Their buying can stall the slide, causing, shorts to cover, and traders buy – the result is a sharp technical rally. The rally can be prompted by news, as well, as it was yesterday when the Financial Times reported a statement by European Commissioner, Olli Rehn, noting there is an “increasingly shared view” that the euro region needs a coordinated effort to address the euro-zone debt crisis.
The market’s reaction to statements like this is typical of declining markets that are being scrutinized by the Street for a turn. They tend to have an abrupt, but brief impact.
OK, Brooksie, you ask, was that a technical rally to be followed by lower prices, or did we just see a market bottom ?
With the market off close to 20% in five months, these institutional behemoths aren’t going to go far wrong by adding to portfolios. They can average down if the market tanks again. If not, they have a position which they can add too as a sustainable recovery gains traction.
Without a doubt, Europe’s inability to solve their sovereign debt woes, dominate investor on both sides of the Atlantic. Without a doubt, this is taking a toll on global economies.
Obviously, a recession there would exacerbate our economic problems here.
So far, it looks like we are headed for an economy that borders on recession.
The big question is, have stock prices adequately discounted today’s bleak picture ?
To answer the question above – have we seen the lows ? No, I don’t. I see the potential for an extension of yesterday’s rally only “IF” it is accompanied by news from Europe that at least a partial solution is in the offing. After the close, Moody’s announced a three-level downgrade of Italy’s credit rating.
I believe an outstanding buying opportunity is shaping up, Without big news out of Europe, I just don’t think we are there yet. Break below DJIA 10,000 is still a very good possibility.
Today: Resistance begins at DJIA:10,890 (S&P 500: 1130. Minor support is DJIA 10,590 (S&P 500: 1109), and that’s a stretch.
More uncertainty, and the market will decline in search of a comfort level.
In a declining market and especially a bear market, technical rallies along the way can suck investors in prematurely creating paper losses that have to be recouped before gains are achieved. Poor timing in attempts to trade technical rallies can chew up capital quickly.
This is a big week for economic reports and may offer a clue to the direction of our economy. So far, the readings are marginally positive.
Monday, the ISM Manufacturing Index for September was reported to have jumped to 51.6 from August’s 50.6, better than expectations. State and local spending on infrastructure projects (schools, roads and waste disposal facilities nudged Construction Spending 1.4 percent higher in August, beating forecasts for a decline of 0.2 percent.
Tuesday, August Factory Orders increased by the most in three months, however continued growth will depend a lot on European economies.
Wed. 8:15 am: ADP Employment as of 12th each month and encompasses 400,000 businesses – clue to vital “Employment Situation” report on Friday. Today’s ADP Employment report stands to be a sneak preview of Friday’s Employment Situation report. It came in at a plus 91,000, better than the projected 75,000, two-thirds of it small business employment.
Wed. 10 am : September ISM Non-Manufacturing report of 375 firms encompassing agriculture, mining, construction, transportation, communications, wholesale and retail trade. This is projected to decline slightly from August, an indication the economy is struggling.
Thurs. 8:30 am: Jobless Claims– Declined 37,000 for week ending Sept. 24, a welcome positive. October 1 important.
Fri. 8:30: Employment Situation: Very important as clue to progress in “jobs” situation. Also includes Unemployment rate.
Fri. 10 am: Wholesale Trade Inventories
Fri. 3 pm: Consumer Credit which can be impacted by auto sales.
The SuperCommittee has been lost in the shuffle, upstaged by international financial worries and the state of our economy here at home. Nevertheless, it will raise its ugly head to remind us our government is, or is not, dysfunctional.
12-member SuperCommittee timeline:**
Oct. 1- Dec. 31: Both houses of Congress must vote on a Balanced Budget Amendment.
Oct.: 14: Deadline for House and Senate Standing Committees to submit recommendations.
Nov. 23: Deadline for both houses to vote on a plan with a 10-year deficit reduction goal of $1.5 trillion Dec. 2: Deadline for committee to submit report and legislative language to President Obama and
Dec. 23: Deadline for both houses to vote on committee bill.
Jan. 15, 2012: Date that the “trigger” leading to $1.2 trillion of future spending cuts goes into effect if
the committee’s legislation has not been enacted.
Feb. 2012: Approximate time when first $900 bn of debt ceiling runs out.
Feb./Mar.2012: Deadline for Congress to consider a resolution of disapproval for the second tranche
($1.2 – $1.5 trillion) of debt limit increase.
Fall/Winter 2012: When additional $2.1 – $2.4 trillion of borrowing authority from this law runs out.
Jan.2, 2013: OMB orders sequestrations for defense and non-defense categories of spending necessary
to meet spending cuts required by the “trigger.”
Recent blog headlines:
Sept. 16, DJIA: 11,433 “Easy Does It ! Test of August Lows Possible”
Sept. 19, DJIA: 11,509 “Consolidation Pattern to be Resolved Soon”
Sept. 20, DJIA: 11,401 “Beware – Breakout Fake out in the Offing”
Sept. 20, DJIA: 11,401 “Breakout – a Fake out in the Offing ?”
Sept. 21, DJIA: 11,408 “Muddied Waters – News Prompted Breakout a Potential Fakeout”
Sept. 22, DJIA: 11,124 “Opportunity to Follow Wrenching Probe for a Bottom – Dow 9,680 ?”
Sept. 23, DJIA: 10,733 “Don’t Buy a Bounce Fueled By Reassuring Statements”
Sept. 26, DJIA: 10,771 “Stock Market Bottom Here – Premature”
Sept. 27, DJIA: 11,043 “Market Bottom Needs More Time”
Sept. 28, DJIA: 11,180 “Getting Close to a Breakout (UP or Down) From Two-Month Trading Range”
Sept. 29, DJIA: 11,010, “Approaching Consolidation Crossroads – Up ? or Down ?”
Sept. 30, DJIA: 11,153, “Bulls Need a Big Day, or Else”
Oct. 3, DJIA 10.913, “Almost Ugly Enough for a Buying Juncture”
The writer of Brooksie’s Daily Stock Market blog, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.