Morning Thoughts Friday November 4

After two days of extreme uncertainty stocks yesterday managed to put together a solid rally.  A little more visibility out of Europe as Greece cancelled its referendum coupled with a rate cut from the European Central Bank inspired investors to buy some stocks, or at least cover some shorts.  When it was all set and done at the closing bell in New York the S&P 500 index closed up 1.88% for the day while the Russell 2000 small cap index rallied almost 2.50%.  Yesterday’s gains pushed the S&P 500 back into the black by 0.28% for 2011 and the Nasdaq Composite Index into the black by 1.70% for the year.  European indices such as the German Dax for example remain more than 10% in the negative for the year.

If we take a closer look at the technical picture of the S&P 500 we note that the index remains well within that 1200- 1300 range I’ve been discussing, which also roughly coincides with the range between the 50 and 200 day simple moving average.  Much if not all of the near-term direction in the market is in the hands of European officials so making any proclamations beyond a couple of days here seem silly to me.  The best guess at the moment is to find reference levels to lean against.  To me 1300 or a smidge above on the S&P 500 looks like a good level to call tops of this bear market rally.    

Banks lagged for the better part of the day yesterday but in the final lap made up good grounds to close the day near the middle of the pack.  The sector as viewed through the chart of the SPDR Financial ETF (NAR:XLF) found support above the 50 day moving average, which roughly coincided with the 38.2% Fibonacci retracement of the early October to late October rally.  Banks remain front and center focus on the corporate front, however should we get a further rally over coming weeks it may well be possible that the financial sector stands out as a relative outperformer.

After getting beaten the first part of this week, the EUR/USD FX cross also managed to get back on its feed yesterday, much intact with the positive correlation the cross has been displaying with equities.  As such I am keeping a close eye on the EUR/USD again for should it run higher with equities in coming weeks it may well find resistance around the 1.42 level, which corresponds to a downtrend line from the May highs.  That in turn would then also likely mean a stop in the rally for equities.

All in all as discussed above, we remain in a choppy sideways market that can be played by the quick trader if stop and profit target levels are strictly adhered to.  For the long-term investor or part-time gamer the current environment is best spent on the sidelines.


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