Rhodes Report Nov 17

The markets are all over the place this morning and it is due to yesterday’s late-day Fitch report that said that US banks would be in a world of hurt if the European mess escalated to the downside. No kidding would be our retort, but the S&P and other markets faltered badly in near panic selling in the final hour of trading…the S&P lost nearly -30 points. This, when combined with this morning’s poor Spanish 10-year debt auction that wasn’t fully subscribed, with the yield rising to near the magical 7.0% level – exacerbated the move lower. This pushed the S&P futures down from a +11 point gain to a - 10 point loss in a matter of hours. However, the US released a few “unexpected” strong economic data points (unemployment claims down to 380k and housing starts that were flat) that have allowed the S&P futures to rally off their lows and now stand with a gain of +2 points. In other words, the manic trading is back in place.

We should note that this morning’s S&P futures fell to a very important support level at 1220…and held. We find this bullish, and we would venture that this morning’s lows will be the lows for the next several days or weeks until the currently developing pennant pattern breaks out and extends higher towards our 1370-to1407 target zone; or whether the pennant breaks out higher…and fails. At this point, we believe the risks are balanced for each – it shall be the tenor of the advance/decline and the volume associated with the relevant news out of Europe that will determine which alternative comes into play. If the S&P closes below the 1208 level…then all bets are off.

TRADING STRATEGY: Last Wednesday, we were stopped out of long positions on the sharp move lower, and we are now flat. Now, we’ve looked upon weakness to become buyers once again; and we’ll do so again this morning by adding Transocean (RIG) and Ecana (ECA). We’ll look to do even more in the days ahead as the market tells us the bullish pennant is indeed the proper pattern to play upon, which will require prices to breakout above 1276. HOWEVER, if at any time the 1208-to-1220 zone is clearly violated to the downside – then we must consider exiting our long positions and putting on short positions. In other words, we are buyers only as long as the 1208 remains in place as our backstop.

STOCKS: The Fed “Twist” remains in place, with the prospect for QE-3 very much on the table in our opinion — especially if the employment figures continue to show weakness. This likelihood, coupled with the lingering questions regarding the European debt contagion, and decelerating world economy — including China — should allow stocks to climb the Wall of Worry in the weeks and months ahead. But make no mistake, this is simply a rally within a bear market.

STRATEGY: Technically speaking, the S&P 500 has broken back above the major long-term resistance zone between the 15-mma/45-mema zone between 1243/1189; which is critical given it delineates bull & bear markets. The recent correction back to the 380-dema at 1208 found support, and led to a test of the highs. That is failing; now 1208 is important.