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Market’s Mixed Messages Toy With Investors

By: Sam Collins
Posted: 11/22/2010 3:47:00 AM
Referenced Stocks: BA;EU

A headline grabbing week, in which the stock market was drubbed on Monday and Tuesday, ended on Friday with a whimper. However, despite the flat close, the U.S. markets still must confront worries over China's response to its growth rate, Europe's shaky economies, and the long-term impact of the Fed's second round of quantitative easing (QE2). On Friday, China raised its bank reserve requirements, but that had little impact on trading since the increase had been anticipated.

Tuesday's sharp fall was in part due to China's tighter money policy and the resulting impact on U.S. exports to that massive market. Ireland's fragile economy was in the news for the entire week, but late news on Friday seemed to indicate that talks with the European Union (EU) and the European Central bank are going well. And on Sunday, it was announced that Ireland had applied to the EU for a bailout worth tens of billions of euros.

Of the Dow Industrials, The Boeing Company (NYSE: BA ) was the worst performer, down 1.6%, and The Walt Disney Company (NYSE: DIS ) was a close second, off 1.5%. The top gainers were Hewlett-Packard Company (NYSE: HPQ ), up 2.18%, and American Express Company (NYSE: AXP ), up 1.25%.

In corporate news, AnnTaylor Stores Corp. (NYSE: ANN ) jumped 8.5% on better-than-expected Q3 earnings and same-store sales. Caterpillar Inc. (NYSE: CAT ) said that it is buying Bucyrus International, Inc. (NASDAQ: BUCY ) for a 32% premium of $7.6 billion, and EMC Corporation (NYSE: EMC ) said that it will pay Isilon Systems, Inc. (NASDAQ: ISLN ) $2.25 billion, which is a 29% premium.

General Motors Co. (NYSE: GM ) closed on Friday at $34.26, one day following its successful return to the NYSE following its restructuring and IPO.

The benchmark 10-year Treasury note rose on Friday bringing its yield to 2.87%. Thirty-year Treasury bonds fell to a yield of 4.24%. The euro gained versus the dollar, and late Friday was quoted at $1.3691 versus $1.3628 on Thursday.

At Friday's close, the Dow Jones Industrial Average rose 22 points to 11,204, the S&P 500 was up 3 points to 1,200, and the Nasdaq rose 4 points to 2,518. The NYSE traded 1.1 billion shares with advancers over decliners by 1.4-to-1. The Nasdaq crossed 581 million shares and advancers were ahead by 1.2-to-1. For the week, the Dow rose 0.1%, the S&P 500 was unchanged, and the Nasdaq was unchanged.

Crude oil for December delivery fell 34 cents to $81.51 a barrel, and the Energy Select Sector SPDR (NYSE: XLE ) rose 53 cents to $63.59. December gold fell 70 cents to $1,352.30 an ounce, and the PHLX Gold/Silver Sector Index (NASDAQ: XAU ) rose 1.58 points to 212.37.

What the Markets Are Saying

This has been a "headlines related market" for months, but last week almost every twist and turn could be related to a headline-grabbing event in some part of the world. This makes for some interesting days for traders, but does little for the average investor. Prices see-saw from support to resistance and back again, sometimes traversing price bands in a matter of hours rather than the days or even months that was typical several years ago.

The general result of this type of volatility is that the "big money" and long-term investors tend to stay away. Thus, the markets are left to short-term traders, some of whom are often in and out in a matter of minutes, and this leads technicians to label the market as having little commitment or conviction.

Last week, we saw the S&P 500 traverse the entire support zone of 1,210 to 1,174 in three days, and then jump to an intraday high of 1,200 on Thursday, and close at the round number on Friday.

Technically that's an upside reversal after falling from its new high for the year to the important support at just above its 50-day moving average, and then jumping to a big round number like 1,200. But the bears would say that the rally was preceded by "9-to-1″ volume down days with the highest volume since June. The bulls say that the reversal up to 1,200, which is just above the 20-day moving average of the S&P 500, coupled with the big volume down day on Tuesday was a "selling climax," which will result in a new high.

So who is correct? When faced with a stand-off between bulls and bears, it is sometimes helpful to go to our indicators, both internal and sentiment, for a clue. Here is what they show:

Internal indicators, chiefly Moving Average Convergence/Divergence (MACD) , momentum, stochastics and Relative Strength Index (RSI) , have moved from extreme "overbought" numbers to modestly "oversold," and the stochastics have even flashed a near-term "buy" signal.

Sentiment indicators are mixed with Investors Intelligence telling us that the advisers are now bullish, surging from 48.4% to 56.2% in just one week, while the bears fell to 20.2% from 23.1%. In the words of II, this "shows that there is less and less cash on the sidelines," and is thus a bearish sign. However, the AAII Sentiment Survey shows that the bulls have fallen to 40% from 57.56% in just one week with bears increasing from 28.49% to 32.50%, and that is modestly bullish.

On balance, despite the mixed signals, I believe that the technical situation is mildly bullish only because the last strong technical signal was Thursday's impressive reversal. But the bulls must back this up with a solid breakout on strong breadth and high volume or prices will collapse back to support at 1,174 or lower.

If you are a long-term buyer of stocks with a buy-and-hold strategy, then there are many good values to be had as long as you recognize the volatile nature of the market. But if you are a trader or short-term holder, then you must memorize the support and resistance numbers for the major stock market indices, as well as for the stocks in which you have an interest. Buy on support (low numbers) and sell on resistance (high numbers). This is easy to say and difficult for most traders to execute because it is almost always contrary to the current run of headline news.

See market's support zones here.

Today's Trading Landscape

To see a list of the companies reporting earnings today, click here .

For a list of this week's economic reports due out, click here .

If you have questions or comments for Sam Collins, please e-mail him at .