The market pull back in mid November was a little frightening but then they usually are. I suggested that investors should look for a 3% to 5% correction in the market and the S&P 500 delivered a -4.3% decline before traders jumped in to buy the dip. The lows last week were 1173, which was pretty close to the 1175 level we suggested you watch for support. Will stocks go straight up from here? Probably not but it's nice to see the up trend is still intact.
China raised bank reserve ratios again in an effort to slow down their economy. They've done this several times already this year, which reduces the amount of capital banks have available to lend out. Investors still seem worried that China will raise interest rates to slow down their inflation problem but after a -10% decline in the Shanghai market those fears may already be baked in. The Chinese market has already begun to rebound.
Meanwhile Europe remain front and center for many market participants. The apparent meltdown in Ireland has been averted thanks to a bailout by the IMF and EU. Sadly this may have only postponed the problem. Greece was the subject of a major bailout months ago but now many analysts are still expecting Greece to default on their sovereign debt about half way through 2011. When that happens it will once again shake investor confidence and raise doubts about the longevity of the European Union and the euro. One thing we are almost guaranteed to see next year is volatility in the euro and the dollar.
The economic situation here in the U.S. seems to be improving. Analysts are predicting that holiday sales could be the best we've seen in years. The retailers are pulling out all the stops with multi-day black Friday sales. Of course next week will be a holiday shortened trading week as the U.S. celebrates the Thanksgiving holiday. Aside from the holiday the big event on Wall Street will be the FOMC minutes, released on Tuesday. Investors want to know what the Federal Reserve was thinking at their last November 3rd meeting. Tuesday will also see the release of the next Q3 GDP estimate. Economists are expecting GDP growth to improve from +2.0% to +2.4%. Additional economic reports hitting the wires this week are: existing home sales, new home sales, mortgage applications, durable goods, personal income and spending, and the initial and continuing jobless claims.
Looking at the S&P 500 index we can see how the index bounced from support near 1175 and rallied back to psychological support/resistance near 1200. Traditionally Thanksgiving week tends to have a bullish bias and with that in mind I expect the S&P to break higher past the 1200 level. Bigger picture stocks might churn sideways for a little while but I can't tell you if the trading range is 1200-1175 or 1225-1175. The good news is that like Thanksgiving the month of December tends to have a bullish bias as well. If the S&P 500 can close over the 1225-1230 zone it will alleviate fears that the market is forming a big bearish double top pattern.
Daily chart of the S&P 500 index:
Weekly chart of the S&P 500 index:
The NASDAQ composite came close to a -5% correction and the bounce has carried it back toward its spring highs near 2520. Overall trader sentiment for the tech sector remains optimistic in spite of CSCO's earnings report a couple of weeks ago. My only concern is that the high-flying tech stocks that helped fuel this rally are so overbought and extended that eventually they will see a correction.
Daily chart of the NASDAQ index:
In summary I remain optimistic on stocks. We are in a seasonally bullish time period for the market. Right on cue traders bought the correction suggesting this bull market is still very much alive. We still need to be disciplined with our entry points and stops. I'd much rather wait for stocks to dip toward support but we may not see a normal dip in this market. At the same time we're starting to see more bullish breakouts through resistance, which can offer an alternative entry point but it creates a challenge on stop loss placement. Don't be afraid to take a profit if you have one!