Not Getting Any Worse

Daily State of the Markets 
Friday Morning – August 12, 2011

Good morning. To review, the primary purpose of our Daily State of the Markets report is to identify the drivers of the market action on a daily basis. As I’ve said a time or 20, the thinking is that if we can stay in tune with what the market is doing on a daily basis we aren’t likely to be surprised by the action on a weekly, monthly, or even annual basis. But as anyone who has ever clicked the buy button can attest, this task isn’t always easy.

For example, Thursday’s market once again involved a scary amount of volatility (but all’s well that ends well, right?). However, this time there wasn’t any specific news item, rumour, or even a wink by a government official to drive the action. Well, OK, I should say that there wasn’t any obvious drivers for the joyride to the upside, which wound up reversing Wednesday’s big drop, which had been a reversal of Tuesday’s upside blast, which, of course had reversed the reversal of the reversal (or is that one too many reversals? – I can’t tell anymore). In short, if your head isn’t spinning at this stage of the game, you simply aren’t paying attention!

In the early going, there actually was a driver to the action. rumours of problems at another French bank (this time it was BNP Paribas) involving Greek debt put traders back in fear mode and drove prices back down to where they finished on Monday and Wednesday. However, with officials all over the continent jumping up and down swearing that “everything’s ok here,” the sentiment quickly improved.

And from there, the fact that things didn’t get any worse on any of the market’s hot topics appeared to drive the action. No news out of Europe for the majority of the day was considered good news. The fact that yields across the pond didn’t spike was a positive. An earnings report from Cisco that wasn’t a debacle certainly helped a little. And a report on Jobless Claims here in the U.S. suggesting that the employment picture did not get any worse over the past week was suddenly a good thing.

So there you have it. Stocks soared another 4-5% on the idea that things didn’t get any worse – anywhere yesterday. Hip, hip, hooray!

Actually, the action does make a fair amount of sense. As we mentioned yesterday, the stunning drop on Wednesday was driven by fear – the fear of what might happen. The key here is that a fear trade can quickly reverse, which is apparently what took place on Thursday. However, from where I sit, it looks like the market is seeking an equilibrium point. The thinking is that perhaps some of the wild-arse (yes, that is indeed a technical term) movements to the downside might have been overdone. If the economy is not heading into recession as many analysts I trust seem to believe, then a decline of 15%+ over 12 days might have been a teensie bit of overkill.

In addition, anybody that has around since the late 1980’s has inevitably learned how crashes, bad-news panics, and/or waterfall declines work. In short, if you’ve studied your debacle patterns, you know that stocks dive to an emotional low on huge volume on the idea that the sky is indeed falling. Then when the sun comes up the next day, you tend to get an eye-popping rally that makes you question the validity of the big drop. After that, the reasons behind the big decline tend to resurface and you get a pullback/retest to “test” the validity of the bottom. And then finally, the fundamentals tend to retake the spotlight.

So, where are we now? It would appear that we can make a checkmark next to the emotional/panic low. And then perhaps we can put a check in the “big bounce” column. My guess is that the bounce could continue and make everyone feel better going into the weekend. If we do see a continuation today, I’ll argue that the bounce (which usually lasts 1-3 days) is “on.” And with things not getting any worse on any front so far today, it looks like this just might be a possibility. However, if the bounce suddenly fails miserably, we may have to go back to square one. So, here’s hoping things don’t get any worse.

Turning to this morning… While the economic news out of France wasn’t inspiring, there was a report out of the UK that was – wait for it – above expectations! Perhaps this explains the strong reversal in Europe. However, the bottom line is that the sentiment is improved this morning across the pond.

On the Economic front… The Commerce Department reported that Retail Sales rose in the month of July by +0.5%, which was below the consensus for +0.6%. When you strip out the sales of autos, sales were also up +0.5%, which was above the consensus for a reading of +0.3% and above last month’s revised +0.3%.

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: +0.82% Shanghai: +0.45% Hong Kong: +0.13% Japan: -0.20% France: +1.74% Germany: +1.74% Italy: +2.31% Spain: +2.04% London: +1.42%
  • Australia: +0.82%
  • Shanghai: +0.45%
  • Hong Kong: +0.13%
  • Japan: -0.20%
  • France: +1.74%
  • Germany: +1.74%
  • Italy: +2.31%
  • Spain: +2.04%
  • London: +1.42%
  • Crude Oil Futures: +$0.46 to $86.18
  • Gold: +$7.00 to $1758.50
  • Dollar: higher against the Yen, lower vs. Euro and Pound
  • 10-Year Bond Yield: Currently trading at 2.301%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value): S&P 500: +9.20 Dow Jones Industrial Average: +64 NASDAQ Composite: +7.38
  • S&P 500: +9.20
  • Dow Jones Industrial Average: +64
  • NASDAQ Composite: +7.38

Wall Street Research Summary


  • Anheuser-Busch InBev (BUD) – BofA/Merrill
  • CEMEX (CX) – BofA/Merrill
  • Alcoa (AA) – BMO Capital
  • Discovery Communications (DISCA) – Citi
  • Allegheny Technologies (ATI) – Citi
  • Patriot Coal (PCX) – Citi
  • Edison Intl (EIX) – Credit Suisse
  • Edwards Lifesciences (EW) – Credit Suisse
  • Airgas (ARG) – Goldman Sachs
  • Valspar (VAL) – JPMorgan
  • AutoZone (AZO) – Oppenheimer
  • Bed Bath & Beyond (BBBY) – Oppenheimer
  • PetSmart (PETM) – Oppenheimer
  • Southwestern Energy (SWN) – RW Baird
  • Check POint Software (CHKP) – Stifel Nicolaus
  • Nordstrom (JWN) – Stifel Nicolaus


  • Jabil Circuits (JBL) – BofA/Merrill
  • Sanmina-SCI (SANM) – BofA/Merrill
  • Flextronics (FLEX) – BofA/Merrill
  • Plexus (PLSX) – BofA/Merrill
  • Eastman Chemical (EMN) – Goldman Sachs
  • BP (BP) – Goldman Sachs
  • Bally Technologies (BYI) – JPMorgan
  • CF Industries (CF) – JPMorgan
  • DeVRY (DV) – RW Baird
  • Websense (WBSN) – Stifel Nicolaus


Yesterday’s Earnings After The Bell


Cisco Systems CSCO $0.40 $0.38 Jack In The Box JACK $0.25 $0.40 Kinross Gold KGC $0.20 $0.17 News Corp NWSA $0.35 * $0.30
Earnings Before The Bell


JC Penney JCP $0.07 $0.09* Report includes items that make comparisons to the consensus estimate questionable

Long positions in stocks mentioned: AZO

For more of Mr. Moenning’s thoughts and research, visit


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