MARKETS

Tuesday’s drop gave investors an excellent entry point for what looks like a sustained rally. Of course, certain groups appear better than others at the moment, writes MoneyShow.com senior editor Tom Aspray.

It was another headline-driven week for the markets, as last Tuesday’s plunge in reaction to uncertainty in the Euro debt plan shook the confidence of even some bullish investors.

As I noted last week, the market was quite overbought, so a correction was likely. But it was sharper than I expected.

The market is now awaiting the confidence vote in Greece, which will be completed late Friday, and concerns have been growing over Italy since Prime Minister Silvio Berlusconi turned down funding from the IMF on Friday. The Italian bond and stock markets were not convinced, and once again came under pressure.

Though Tuesday’s losses were quite severe, if you look at the charts the pullback looked fairly normal. In many cases, Tuesday’s decline just filled the gaps from the previous week, which is pretty normal from a technical standpoint.

The MF Global debacle also shook the confidence of investors. After many years in the market, I am still surprised that this type of mismanagement within a financial organization can still go on undetected. The highly leveraged position in euro debt held by MF Global was shameful, and unfortunately it is the employees and customers of MF Global who bear the brunt of the pain.

Certainly, the battle between the bulls and the bears continued, and it is likely that many weak longs were taken out of them market last Tuesday. Stocks finished the week lower for the first time in five weeks.

However, last Thursday’s strong gains in reaction to the surprise rate cut by the ECB put the bulls back in charge. On Friday, stocks edged higher from the early weakness to close well off the lows, which was encouraging.

The good signs came in spite of the disappointing employment report. And while the number of new jobs missed expectations, the upward revisions in the prior months were positive. This suggests that we may see further upward revisions.

Most economists have now given up on the double-dip scenario, though many are staying out of the markets due to concerns over Greece (and now Italy), as well as the impending deadline for the supercommittee.

The markets took the lack of a definitive final communiqué from the G20 meeting pretty well. It does seem that the IMF will have emergency funding in place quickly if needed.

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The daily chart of the E-mini S&P futures shows that last Tuesday’s decline held above the key 38.2% Fibonacci retracement support at 1,204.75. A close back below this level would put the bears back in charge. This would project a drop down to the 50% support at 1,178.75.

The futures closed well off the lows, so the bears are likely a bit nervous. It appears that much of the action over the past two weeks has been in the futures; volume was especially high on October 27. This was likely portfolio managers belatedly jumping into the market…but one wonders how many were stopped out last Tuesday, as they quickly had sharp losses.

As I noted in today’s in-depth technical review of the stock market, sentiment did reach an extreme in early October, but now there are fewer bears. They need to get much more bullish before it is a concern, and typically it takes several months for the sentiment to shift from one extreme to the other.

There were some interesting numbers on money flow last week. It seems as though investors are now willing to accept more risk. It was reported that $25 billion moved out of money market funds, which was the highest since August. Another $3.5 billion went into emerging-market equities. The last time the flows were that high was in April.

Money also flowed out of the Treasury market. As I noted a last week, a shift from bonds to equities could provide fuel for even a stronger stock rally. If these trends continue over the next few weeks, they could have intermediate-term significance.

Other economic data was mixed. Retail sales were a bit lower, though some stores like Kohl’s (KSS) exceeded estimates.

Forecasts for consumer spending during the holidays are still low, but I continue to think that the actual figures will beat analysts’ expectations. I still like the retail sector, and think it can continue to move higher until we get closer to the holidays.

This week is fairly light for economic news. The most notable numbers come at the end of the week. Thursday, of course, we have weekly jobless claims, as well as the international trade and Import/Export prices. This is followed on Friday by the latest readings on consumer sentiment, which is probably the biggest report of the week.

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Tickers Mentioned: SPY, DIA, QQQ, IWM, GLD