Stock Market Update: Thanksgiving Rally?
Tuesday, November 20, 2012
Stocks soared on Monday with the popular averages recovering most of the losses of the previous week. More importantly, upside volume overwhelmed downside momentum by a ratio of more than 10 to 1. Opening the holiday shortened week, the equity markets benefited from a deeply oversold condition, better than expected news on housing and increased optimism that Washington will garner a compromise on taxes and spending. Also important on Monday, the S&P 500 overcame the first area of resistance which is 1375 to 1425.
From here, the going is expected to be more difficult. Most worrisome is in the area of investor psychology. The CBOE Volatility Index plunged to 15 yesterday, which is a sign of complacency. Since 1996 the best rallies have occurred with the VIX above 25. In addition, the demand for puts evaporated yesterday and the consensus view appears to be that fiscal cliff will be avoided. It would be helpful if bearish sentiment re-appeared on any further price gains in the stock market.
We would also like to see a second session where upside volume exceeds down by more than 10 to 1. These events would offer solid evidence that the lows for the cycle are in place. Outside of these technical developments, the typical pattern following a harsh down would be for a relief rally, followed by retest of the November lows. Should this patter hold true, it will be important that pessimism increase and the number of stocks hitting new lows contract. This would place the market in a strong technical position for a good year-end rally.
On the economic front, existing home sales for October rose 2.1% to a 4.79 annual rate in October. Most economists were looking for a drop, although September was revised down slightly. Condos sales, which are very sensitive to the business cycle, rose to the best levels since January 2011. In addition, the NAHB/Wells Fargo Housing Market Index enjoyed the seventh straight increase to its highest level since May 2006. Housing and auto sales have been the backbone of the consumer recovery and this is likely to continue given the unprecedented cost to carry a home or auto loan. It is expected that interest rates will remain low in 2013 as inflation remains muted.
The consumer price index rose 0.1% in October with the core up 0.2%. The only areas showing upside pricing pressures were education and airlines. Most other categories including restaurants, home furnishing, appliances and new vehicles showed no pricing power last month. The inability to raise prices is also due to the slowdown in the global economy. Unemployment in Europe is of particular concern with the jobless rates for young people ranging from 58% in Greece and 55% in Portugal to 36% for Italy and 25% for Spain. Youth unemployment in the U.S. is 17%. As a result, Central Banks around the globe are expected to remain in a printing mode. This includes the U.S. with Treasury Secretary arguing that ‘absolutely’ the debt ceiling should be eliminated.
Bottom Line: Monday’s broad advance hopeful but more evidence needed to become aggressive on the upside. Seasonally, the market tends to rise slightly into Thanksgiving.
Article provided by Robert W. Baird & Co. with the authorization of its author for Evan Guido, Vice President, Financial Advisor at the Sarasota office of Robert W. Baird & Co., member SIPC. The opinions expressed are subject to change, are not a complete analysis of every material fact and the information is not guaranteed to be accurate.
Evan R. Guido
Vice President of Private Wealth Management
One Sarasota Tower, Suite 806
Two North Tamiami Trail
Sarasota, FL 34236-4702
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