Four Year High on the S&P

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The market started off strongly last week before faltering slightly when Federal Reserve Chairman Ben Bernanke did not hint at additional easing, but said instead that he is ready and willing to act should the economy falter. He called weakness in the job market a “grave concern” that he will closely monitor. Plans to create a “bad bank” in Spain to handle troubled loans helped things as the market finished Monday higher.

Economic data released last Tuesday underwhelmed the market. The August ISM Index came in slightly below expectations and July construction spending fell slightly from the prior month. Morning weakness was offset by a steady climb higher as those in the know felt good news coming later in the week form Europe would offset any near term economic numbers. The market closed essentially flat on the day.

Wednesday saw muted trading action ahead of the European Central Bank announcement the following day. The only signs of life in the market Wednesday came after rumors regarding Draghi’s announcement surfaced. 

Thursday saw all the fireworks. The market opened sharply higher with stocks across the board seeing buying interest. It was definitely a risk on day. Mario Draghi announced that the European Central Bank planned to buy bonds of troubled sovereigns who asked for aid. Within the mandate Mr. Draghi said that there would essentially be an unlimited supply of funds to buy troubled bonds. The NASDAQ closed the day at 12 year highs and the S&P 500 closed at levels not seen since January of 2008. Financials ended the week with a sharp advance in response to the news coming from Europe.

Thursday’s rally was also fueled by better than expected ADP jobs data. Friday saw a reversal in jobs related news flow as nonfarm payroll data was worse than expected. With the sharp advance on Thursday and negative jobs data the S&P 500 was still up 0.40% Friday.

Let’s look at the technical condition of the market. Things continue to improve. The long term technical picture for the market is positive. 71% of the stocks in the S&P 500 are in good shape technically. By that I mean that 71% of stocks in the index are either in basing or advancing phases. 65% of small cap stocks are in good shape.

There has been a severe rotation in the market for the past several weeks. That rotation has accelerated over the past two weeks. The prior leaders are weakening and there has been a major rotation into new sectors that are providing leadership. Total return names from the utility, pharmeceutical, and food areas of the market were leaders for quite some time. These areas have now become the source of cash to buy stocks from other sectors. The first area of rotation was the energy sector. Several areas of the energy space have been quite strong for the past several weeks. The financial sector has taken a leadership position over the past few weeks. Money began to move slowly into the sector a few weeks ago in anticipation of European banks and governments getting assistance. Last week saw a stampede into U.S banks and brokers. The financial sector has reacted favorably to quantitative easing in the past and this time around it appears to be no different.

Short term resistance for the S&P/Dow/NASDAQ/Russell 2000 are as follows: 1439/13,340/3140/848. We are currently working on a potential negative divergence as some, but not all of the resistance levels given before have been exceeded. Support levels are 1428/13,245/3120/825. Based on the strength of the recent advance and the new rotation that is taking place any corrections will likely be controlled and orderly. The recent action has been for buyers to come and aggressively bid up stocks when areas of support have held.

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About Thomas J Smith CFA