Are Traders Taking Another Look (At Their Premise)?

Daily State of the Markets  Friday Morning – March 11, 2011

Good morning. A powerful earthquake in Japan overnight has triggered a massive tsunami and a wave of selling in overseas markets (the earthquake hit just 14 minutes before the close in Japan). While tragic from a human perspective, forces of Mother Nature usually don’t have long-lasting effects on the economies of the world. As such, it is important to recognise that the current selling being done appears to be a continuation of traders taking another look at the premise for recent rally.

By now, everybody knows that up until February 22nd, the stock market had been a one-way street based on the concept that U.S. economy had finally reached a growth rate that appeared to be sustainable. The thinking was that with the economic data coming in largely better-than-expected, job creation, as well as all the good things that accompany job growth, couldn’t be too far behind. As such, traders discounted blue skies ahead on a daily basis and bought each and every dip.

Along the way, the market became very overbought and investor sentiment reached extremely positive levels – something that traditionally leads to a corrective or consolidation phase. Thus, the events in the MENA (Middle East, North Africa) regions and the resulting spike in oil became the trigger for the current pullback.

However, up until yesterday, the tape action seen in the market seemed to indicate that this was a garden variety consolidation pattern and that the chances of a meaningful correction (which we’ll define as a decline in excess of -5%) seemed remote. That is, right up until the Chinese reported an upsetting balance of trade number and the U.S. trade deficit spiked yesterday.

In short, the fact that exports only grew by 2% in China (largely due to the increasing cost of oil) got traders’ attention and suddenly the worry about the Chinese economy was back on the front burner. We had already seen that the tightening measures employed by the People’s Bank of China were starting to have an impact. And up until yesterday, the fears that the Chinese might go too far had seemed to largely fade into the background. But with this data, the worry that the world’s leading economy might be starting to slow caused stock traders to revisit the issue and to switch back into “risk off” mode.

It’s easy to see why traders might have instantly reacted to the China data. However, understanding why anybody trading stocks cares about the U.S. Balance of Trade from a stock market perspective might be a different story. The key here is that the trade data is one of the inputs in GDP. And if the deficit continues to spike higher, Q1 GDP could be affected. In fact, Ned Davis Research was out with a note Thursday saying that some of the recent indicators suggest a GDP rate closer to 2.1%, which is a far cry from the current rate of 2.7%.

So, given that the situation in Libya might stick around a while, which could easily lead to more unrest in the region as well as oil prices remaining “sticky” above $100, the issue of European sovereign debt rearing its ugly head again, and reports of a crowd being fired upon (which may have been a bit inflammatory) in Saudi Arabia, the concept of traders taking another look at the premise yesterday certainly makes some sense.

From a chart perspective, the bulls MAY (key word) have a problem here. The bottom line is that the charts of the major indices broke down yesterday on a closing basis – although not by much, and I can argue that the support zone on the NASDAQ remains intact. But if the market can rebound quickly – as it has done over the past two years – then all will be forgiven and the buyers will likely return post haste. However, should the bears find a way to push the indices lower in the next few days, traders may also be taking another look at their commitment levels in the stock market.

Turning to this morning… The big story is the earthquake and the resulting 10-meter tsunami that destroyed some of the Pacific islands and may reach Hawaii or the U.S. Northwest coast. As a result, Asian stock market were down hard. However, with oil (currently trading under $100), copper, silver etc. in decline, traders in the U.S. have yet to hit the panic button. Oh, and the Saudi ‘day of rage’ hasn’t materailized (yet?).

On the Economic front… The Commerce Department reported that Retail Sales rose in the month of February by +1.0%. This was below the consensus for +1.1%. When you strip out the sales of autos, sales were up +0.7%, which was also a tenth below the consensus for an increase of +0.8%.

We will also get the University of Michigan Consumer Sentiment report later this morning at 9:55 am eastern

Thought for the day: Best of luck on this Friday and be sure to enjoy the weekend!

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell…>

  • Major Foreign Markets: Australia: -1.18% Shanghai: -0.73% Hong Kong: -1.55% Japan: -1.72% France: -0.36% Germany: -1.01% London: -0.24%
  • Australia: -1.18%
  • Shanghai: -0.73%
  • Hong Kong: -1.55%
  • Japan: -1.72%
  • France: -0.36%
  • Germany: -1.01%
  • London: -0.24%
  • Crude Oil Futures: -$2.81 to $99.89
  • Gold: +$0.20 to $1412.70
  • Dollar: lower against the Yen, Euro and Pound
  • 10-Year Bond Yield: Currently trading at 3.395%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value): S&P 500: -1.91 Dow Jones Industrial Average: -28 NASDAQ Composite: -6.3
  • S&P 500: -1.91
  • Dow Jones Industrial Average: -28
  • NASDAQ Composite: -6.3

Wall Street Research Summary


  • JC Penney (JCP) – Added to Top Picks Live at Citi
  • Mobile TeleSystems (MBT) – Credit Suisse
  • Domtar (UFS) – Deutsche Bank
  • XL Group (XL) – Added to Top Picks Live at FBR Capital
  • Goodyear Tire (GT) – Morgan Stanley
  • Terex (TEX) – Standpoint Research
  • Watson Pharmaceuticals (WPI) – Target increased at UBS
  • Salix Pharmaceuticals (SLXP) – Wells Fargo


  • Protective Life (PL) – BofA/Merrill
  • Hansen Natural (HANS) – Goldman Sachs
  • Kroger (KR) – Goldman Sachs
  • Evergreen Solar (ESLR) – JPMorgan
  • Comverge (COMV) – JPMorgan
  • Autonation (AN) – Morgan Stanley
  • Thor Industries (THO) – Soleil Securities

Long positions in stocks mentioned: none

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The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice.

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