Betting On Blue Skies?

Daily State of the Markets  
Friday Morning – March 4, 2011

Good morning. I am often asked why I get up so early every morning to write about something as mundane as the stock market. The answer is simple. My primary objective relating to the market is to stay in tune with the drivers of the action. And since those drivers are constantly changing (and at times more than a little difficult to find), getting an early start is the only way to keep up. Many times, the way the market reacts to the early morning news tells you more than the news itself. Thus, I’m of the mind that you’ve got to be there to witness the action and the accompanying reaction firsthand if you want to truly understand what is going on in the game.

Thursday was a prime example of the market doing something that may have been unexpected. I’m not talking about the joyride to the upside at the open, as that was to be anticipated given the early inputs. No, I’m talking about the action in the afternoon. In short, stocks continued to move higher despite the fact that we had heard nothing further regarding the much ballyhooed Venezuelan peace plan and that oil prices were once again movin’ on up.

Here’s the deal. During the current consolidation phase, stocks have been inversely linked to the movement in oil prices the vast majority of the time. The thinking has been that higher oil prices would eventually have a negative impact on the global economy. And with the U.S. economic rebound just now starting to look sustainable, another shock to the system could bring the R word back into the mix. However, Thursday afternoon’s action in the stock market suggests that traders are instead betting on blue skies ahead.

With oil prices reversing early declines on growing scepticism over the ability of one Hugo Chavez to help out his good buddy over in Libya, one might have expected to see stock prices give up those big gains and take a swan dive into the close. Don’t forget, oil only finished down $0.32 on the day and closed at $101.91. Thus, the story about the drop in oil prices that the press yammered on about all day seemed more than a little silly by the time the closing bell rang at the corner of Broad and Wall.

If you recall, a similar situation occurred on Wednesday. With the major indices teetering on the edge of important support, oil prices broke to new highs as the fighting in Libya intensified in the afternoon. And yet, while the bears appeared to have an opening, the bulls somehow managed to hold the line.

So, given that traders have been treated to a big batch of better-than-expected economic data this week, the action over the past two sessions seems to suggest that the economy may trump the worry about what might (or might not) happen with oil prices. Some traders may have been positioning themselves in front of this morning’s Jobs report after Wednesday’s ADP data and Thursday’s big drop in weekly jobless claims (jobless claims came in at the lowest level since May 2008). Some may have been covering shorts after the technical support levels held up. And while one afternoon does not a trend make, some traders may have been readying themselves for the next leg up. After all, up until the trouble in MENA started, just about everyone agreed that U.S. stocks had some room to run to the upside this year.

Heck, even Jean Claude Trichet may be getting into the act of betting on blue skies ahead. Yesterday, Mr. Trichet suggested, as only a central banker can, that the ECB may need to start pulling back on their quantitative easing program and start raising rates – as early as next month. Thus, the folks at the centre of the European debt crisis may also be seeing some clearing in the clouds.

Turning to this morning… Hopes for a peace deal in Libya appear to be fading as oil climbs above $103 this morning. However, foreign markets are up nicely and the day is all about the jobs report, so let’s get to it…

On the Economic front… The labour Department reported that Nonfarm Payrolls rose in the month of February by 192,000. This was just slightly below the consensus estimates for an increase of 198,000. The January totals were revised higher to 58K from 36K and the combination of revisions for January and December produced an increase of 58K jobs.The private sector (aka the household survey) showed gains of 222K jobs, which again was above the estimates.

The nation’s Unemployment Rate was once again a big surprise as it fell to 8.9%, which was below the expectations for a reading of 9.1% and January’s level of 9.0%.

Although stock futures initially rallied on the jobs report, crude’s continued rude rise has pushed prices lower in the last few minutes…

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: +1.14%
  • Shanghai: +1.35%
  • Hong Kong: +1.25%
  • Japan: +1.02%
  • France: +0.28%
  • Germany: +0.59%
  • London: +0.52%


Crude Oil Futures: +$1.39 to $103.30 Gold: +$1.60 to $1418.00 Dollar: lower against the Yen, higher vs. Euro and Pound 10-Year Bond Yield: Currently trading at 3.524   Stocks Futures Ahead of Open in U.S. (relative to fair value): S&P 500: -0.62 Dow Jones Industrial Average: -2 NASDAQ Composite: -1.20 

Wall Street Research Summary


Progressive (PGR) – BofA/Merrill Marathon Oil (MRO) – Target increased at Deutsche Bank Valero Energy (VLO) – Target increased at Deutsche Bank Western Refining (WNR) – Target increased at Deutsche Bank Dollar Tree (DLTR) – Goldman Sachs Capital One (COF) – Morgan Stanley Simcere Pharmaceutical (SCR) – Oppenheimer Altera (ALTR) – RW Baird Fairchild Semiconductor (FCS) – RW Baird Intel (INTC) – RW Baird Lattice Semiconductor (LSCC) – RW Baird ON Semiconductor (ONNN) – RW Baird STMicroelectronics (STM) – RW Baird Foot Locker (FL) – Sterne, Agee Toronto-Dominion Bank (TD) – UBS Viacom (VIA) – Estimates and target increased at UBS 


Citi (C) – BofA/Merrill Goldman Sachs (GS) – BofA/Merrill Amylin Pharmaceuticals (AMLN) – BMO Capital Cephalon (CEPH) – Oppenheimer Canadian Pacific (CP) – Target reduced at RBC Cerus Corporation (CERS) – RW Baird Monster Worldwide (MWW) – William Blair 

Long positions in stocks mentioned: INTC

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