Rally Entering Area of Resistance - Euro-Rally a Fake out

George Brooks |

Stock Market Wall Street Brooksie's Daily Stock Market blog - an edge before the open

Friday, October 6, 2011     9:18 am EDT

DJIA: 10,939.95       S&P 500: 1144.04

Today: The major market averages have moved up rapidly into the middle of the two-month trading range where they can be expected to encounter resistance, i.e. selling by investors who had the wits scared out of them by a sharp sell off last week into Monday morning

   We need a meaningful plan out of Europe to address its sovereign debt problems to lighten uncertainties plaguing global markets. But stock markets appear to be expecting this kind of news, that’s why they are up sharply since Tuesday. While some investors will buy the news when it comes, savvy traders will likely be selling.

   Here’s what sticks in my craw about this market. If the news was really bad, I’d be more comfortable with the current level of stock prices.

It’s only potentially bad.

The economy isn’t in recession, it’s just flirting with one.

The European sovereign debt problem hasn’t caused a meltdown, it just may cause a meltdown.

Greece hasn’t defaulted, it just may default.

Congress isn’t hopelessly dysfunctional, it just refuses to work out solutions  for ideological reasons.

   I suspect the Street thinks it can dodge the bullet this time around, “hoping” that things can’t get worse.

If all players in each of these situations were on the same page, earnestly seeking solutions, I am sure all issues threatening our economies, markets and citizens would find solutions and “uncertainty” would lift.

   Without some big news out of Europe, or the expectation thereof, further upside here is limited, new buying risky. 

   So far, our economic indicators  suggest sluggishness, not a tailspin. However, if Europe’s economies tank due to the impact of sovereign debt issues there, it could tip the U.S. into recession.

Without some concrete progress out of Europe, I think the DJIA declines below 10,000 to mid-2010 levels, and possibly further.  It is bad enough to be faced with adversities, but worse in that there simply doesn’t appear to be any intermediate-term solutions – little to look forward to.

Yesterday was not a bad day considering such a dramatic reversal and 4% surge in the S&P 500  in the last hour of trading Tuesday.  Thirty seven of the 39 stocks accounting for more than 45% of the impact on the Nasdaq Composite advanced, 11 on well above average trading.  Twenty six of the 30 Dow stocks advanced , 5 on above average trading.

Bear in mind, Institutions must put money to work, no one is going to pay them for sitting on cash that isn’t earning squat.  We will see more forays like this with the market down 18% to 20% from its May peak.

   If, and it is a big “IF,” the light suddenly turns bright  green, they will scramble to buy targeted stocks, generally the same list as others are buying, ergo a buying panic.

October has a stellar record for bear market bottoms. What’s more, it preceded the “Best Six Months” for owning stocks (Nov. 1 to May 1).  Toss in the fact over the last 72 years the market has never declined in a pre-presidential election year* and odds favor a strong recovery by year-end.  December 31, 2010 close: DJIA: 11,577, S&P 500: 1257.  The DJIA would have to advance 5.8%, the S&P 500: 9.9% to break even for the year.

Then too, there simply is nowhere else to invest money, and institutions  must put funds to work for clients.

European finance ministers  and politicians are well aware they have to address their sovereign debt issues soon, and they have had more than enough time to work on it. Odds favor announcements in the near future, which is why the market has jumped sharply in the last two days.

   While Europe’s woes have the spotlight, the bottom line for investors is whether we fall into a recession, or not.  If not, and the economy bumps along in a sluggish state, stocks are cheap.

   That’s why monitoring the economic reports is gaining importance. So far this week, the reports suggest the economy is hanging tough.

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 eforecasts 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 : ISM Non-Manufacturing report of 375 firms encompassing agriculture, mining, construction, transportation, communications, wholesale and retail  trade. September was down slightly  to 53 percent from 53.3 in August indicating a slowing of growth in the economy.

Thurs. 8:30 am: Jobless Claims- Declined 37,000 for week ending Sept. 24, a welcome positive, but increased 6,000 for week ending October 1.  Conclusion: OK from the standpoint that the number would be higher if a recession was well underway.

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

Congress.

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”

Oct. 4,    DJIA:  10,654, “ Marching to Europe’s Drumbeat – October Opportunity Looming”

Oct. 5,    DJIA:  10,808, “ News Whipsaw Becoming Problem for Bottom Watchers”

George  Brooks

*Stock Trader’s Almanac

**National Journal

…………………………………………………………………………………………………………

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.

 

 

 

 

 

 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
AXGN AxoGen Inc. 9.03 0.28 3.20 345,922

Comments

Emerging Growth

Reliq Health Technologies Inc.

Moseda Technologies Inc provides mobile and IT cloud computing to increase operational efficiency and security. It develops SmartFleet, a solution designed for commercial use, as well as SmartCare, a mHealth…

Private Markets

WayBetter

The spark hit Jamie when he saw co-workers competing to lose weight. Instead of pizzas and subs, they were eating salads and jogging along the river. Some were sneakily leaving…

Dropbox, Inc.

Dropbox is a service that allows their users to bring all photos, docs, and videos anywhere, and share them easily. Any file saved to Dropbox will automatically save to all…