The bulls took command as we entered December. The market rocketed higher from the open Wednesday the 1st. Stocks had fallen in five of the prior six sessions, but buyers came in from every angle to bid up virtually everything last Wednesday. Support came as European markets were up through positive manufacturing reports on the continent and in China. Also, European Central Bank President Trichet made comments suggesting increased buying of bonds there.
His comments were later supported by the European Commissioner for Economic and Financial Affairs. Rumors were also flying that Fed Chairman Bernanke would back a larger European stability fund via the IMF. These positive reports from Europe drove the dollar down and boosted the Euro. Like I said in an earlier piece, we can debate the long term impact of actions taken by central bankers, but in the near term their position is to do all that is possible to inflate markets worldwide.
Better than expected November ADP Employment Change data was released prior to the open Wednesday. Private payrolls expanded by a better than expected 93,000. All these positives combined to drive the indexes above the recent trading range. The S&P tested support in the 1176/1173 range several times prior to breaking out above the two week range high of 1200. All the major indexes bolted through near term resistance levels on Wednesday. The S&P 500 had its best day in two months. 93% of stocks advanced on Wednesday on heavy volume with 1.1 billion shares traded on the NYSE.
I talk about the technical tone of the market each week. I have written in past pieces that the moves in the market have made a great deal of sense from a technical perspective. On Tuesday of last week the NASDAQ closed below its near term support level, but that weakness was not confirmed by the other indexes. This gave a clue that the bears were going to have to deal with buyers coming in. The recent pullback was from the November high of 1227 to 1173. I won’t bore you with the details but when there is a pullback you begin to point to levels of interest for a subsequent rally. 50% and 61.8% are critical levels that technicians focus on. So, let’s do some simple arithmetic here and see if we can make some sense of this market. Arithmetic! I am now hearing the ominous words of Sister Margaret in my head. But, let’s just deal with the mysteries of the market and leave Catholic grade school for a later discussion.
The move down on the S&P 500 was 54 points (1227-1173). 50% and 61.8% of 54 is 27 and 33 respectively. You then add those numbers to 1173 and you get 1200 and 1206. So, when the market fell to 1173 and began to move higher in the third week of November, 1200 and 1206 were numbers that were used to measure the strength of the market. There was a large spike higher on November 18th right to the 1200 level. There was no follow though and the market traded in a new trading range bordered by 1200 and 1173.
Troubles in Korea, Irish banking woes, a mess in the entire European financial system and rumors that the Chinese were attempting to cool their economy were some of the news items that caused the movement in the market within the 1173 to 1200 trading range. Early last week the market tested the 1176/73 level more than once. When the bears failed to drive the market through support on the last day of November, we were given a signal that the market was poised to move higher. The S&P 500 hit the 1173 support level in early trade on 11/30 and grinded higher the rest of the day to close at 1180. How was this trading range going to be resolved?
We found out at the open last Wednesday. The market spiked right to, you guessed it, 1200 at the open. Stocks went sideways for a few hours then spiked higher to 1206. Two key points to focus on here is first, this rally comes after a two-day test of the rising 50 day simple and exponential moving averages of 1173 and 1176, and second, that the price broke out above its two week trading range along the 1200 level. The 50 day moving averages are critical because many institutional managers will add/reduce to their positions at that level. To see the strong bounce off that area and all the way through the 1200 level suggests the bulls are in charge. This area is now the floor of the range and must hold on any pullbacks.
Stocks continued to move higher Thursday. The S&P 500 gained more that 1%, on top of the previous day’s better than 2% move. The gains were the best back-to-back performance in three months. Home sales figures proved to be a catalyst on Thursday. Homebuilders traded up close to 5% on the day. Retailers continued to post strong numbers and that sector continued its strong performance.
Nonfarm payroll figures released Friday were disappointing. The market sold off early and appeared to shake those numbers off as the day progressed. As I said before, it’s not the news that’s important; it’s the reaction that counts. The market digested the jobs data from the various sources and looked past the current numbers and feels the economy is improving. Investors appear to think that the economy is improving. This fact is evidenced in recent sector rotation in the market. In the second half of the year economically sensitive areas of the market have outperformed the S&P 500. Energy, transports, semiconductors and small cap stocks, all economically sensitive areas, have outperformed the broad market indexes. The leadership exhibited by these areas of the market shows investors view of the economy in 2011 is improving.
The dollar ended down 1.4% Friday, its third straight loss and fourth in five days. Last week was the worst weekly performance for the dollar in the past two months. The weakness in the dollar fueled gains in metals and the market finished slightly higher after the huge advance of the prior two days.
1228 remains the area of resistance for the S&P 500. 1228 represents a 62% retrace of the move lower from 1576 in 2007 to the 2009 low of 666. That is clear resistance, with support at the prior resistance of 1200. Do not be surprised to see the market fluctuate between these levels. The market was flirting with critical support levels less than a week ago. The move higher was rapid and broad based. The battle at the 2010 highs now begins and there will be some profit taking which will lead to a sideways market. If the 1228 level is taken out there will be an aggressive move higher in the market. 11,452 is the critical area of resistance for the Dow. Those are the keys level to focus on over the next few weeks.
