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Encouraging October 22, 2011

Posted by Tom in Thoughts.
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The markets are looking better.  But we have a few hirddles to jump in the coming weeks.   We finally got a rally with increasing volume (note chart below).    But:  1) The situation in Europe still dominates the short-term direction.  2) Friday was options expiration.  3)  We are in the middle of 3rd quarter earnings.  4)  Previous market Support, which now becomes Resistance, looms above.  Let’s take them one at a time.

1)  There is a big meeting this weekend (10-24-11) to discuss the EU recover plan; which is somewhat patterned after the US’s TARP plan.  News either positive or negative could have a big effect on world markets come Monday morning.

2)  While I note an increase in volume, which could be more institutional money coming into the market pushing prices higher; Friday was options expiration.  There is usually significant volume in the 2 days before expiration.  Let’s see how this holds up next week.

3)  Third quarter earnings have been a mixed bag.  Apple, IBM and some big banks have done “OK”, but disappointed projections of earnings growth.  A sign of a slow down?  That’s the concern.  Watch data on consumer spending.  That will be a precursor for future earnings.

4)  A ceiling above us?  The old Support area of 1265 is right above.  That is a major area.  How will investors respond to a chance to “get my money back” ?  Again, we’ll watch volume.  Is it heavier on Up or Down days?  That should tell us something.  (BTW, click on graphics to enlarge them; this is not an eye test.  🙂   )

Do we currently see stocks being Accumulated?  Yes, and that is a positive sign.  The pie chart below shows the number of stocks in the broad S&P 1500 that are in stages of accumulation (buying) and Distribution (selling).  A significant improvement over previous weeks data.

                              chart courtesy of www.highgrowthstock.com; used with permission, copyright 2010-11.

Caution:  with this rise in prices I would expect a correction (prices falling).  Do not be surprised to see this soon.  The question is are shares being dumped into this rally, or is it shallow and just a natural pause?  I’ll be watching volume for clues.  It may be a good opportunity.

What sectors are doing well:  Retail, Consumer Staples, Consumer discretionary, Dividend Stocks, select Tech stocks, Software and Utilities.  I’d like to see more leadership in Tech, Finance and Basic Materials (economic stength) before I get too giddy.

Have a Good Week !

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