Stock Market Analysis

Thursday, April 12, 2012

Dow Gains on US Trade Gap Shrinkage

The Dow gains 181 points as US trade gap makes surprising shrinkage.

Fundamentals
Global markets were largely positive prior to US market open, setting an optimistic stage for today's market. This optimism was then compounded by a surprising shrinkage of the US trade gap announced at 8:30am, setting the market up for a strong opening and allowing investors to look past a worse than expected jobless claims. This is the first shrinkage of the trade gap after 3 consecutive widening months and the smaller the trade gap, the smaller the drag on GDP growth, hence the positive mood in the market today. Indeed, the macro picture has proven more important than the more micro jobless claims which will definitely improve with an improving economy. This means that the long term outlook of the US market remains solid despite short term volatility. Investors returned to equities from bonds, raising bond yields across the board for a second straight day and options traders also took total equities put call ratio below 0.9 for the first time in 6 trading sessions in support of call options trading.

Technicals
The Dow seems to have finished a significant short term correction so far and is now retesting the 50MA for resistance before it can decide if it is still good for one final leg up before "selling in May and going away". If it fails at this level over the next few days, we could see that big intermediate correction happen right from here onwards. In fact, it is almost certain the Dow is going to make a small sideways day tomorrow as it struggles for strength at this level tomorrow. As such, it is still time to be cautious.

For now, the Dow remains in short term neutral trend within an intermediate and primary bull trend.

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