Reading Between The Lines (Of Volatility)

Daily State of the Markets 

Wednesday Morning – March 16, 2011

Good morning. Coming into Tuesday morning, the market seemed simple enough to understand as stocks were being pummelled globally on fears of a nuclear disaster in Japan. There was no need to read between the lines; the news was bad and getting worse with each report as we heard about nuclear reactor fuel melting and radiation levels increasing in places as far away as Tokyo. Thus, it didn’t take much imagination to envision the already horrific situation continuing to worsen.

Within five minutes (literally) of the opening bell, the Dow was down nearly 300 points and given that there was little support to be found on the charts, it looked like prices could go even lower. However, as has been the case lately, the “fade trade” went into effect right on queue.

In case you’re not familiar with this technique for printing money, the fast-money types tend to let the market open for anywhere from three to five minutes and then simply “go the other way.” There is really no fundamental reason for the trade, but as I’ve been observing it for some time now, I can say it has been fairly effective.

But I digress… The question on the minds of investors at this stage of the game is what to make of Tuesday’s big dive and the impressive rebound. In reading between the lines of the action, we’re going to conclude that the most important thing to understand right now is that this remains a news-driven market.

And the bottom line is that once we got past the news of a third explosion at the Japanese nuclear facility in Fukushima and word that radiation levels were rising, the news was actually pretty good for the remainder of the day. Therefore, stocks rose in response. Yes fans, sometimes it is that simple.

Although there was some additional bad news thrown at traders Tuesday (Bahrain declaring a State of Emergency and announcing that the military was taking over for the next three months leaps to mind), the attention was clearly focused on Japan. So, once traders figured out that the nuclear problem in Japan was more like Three Mile Island than Chernobyl, the question of what exactly everyone was so worried about from an economic perspective seemed to take centre stage.

Remember, Chernobyl was the equivalent of approximately 1 million Three Mile Island’s. And according to nuclear experts, the situation in Japan is much similar to Three Mile Island. In both of these cases, the nuclear reactors shut down almost immediately.

This was not the case in Chernobyl as the whole problem there was that the reactor couldn’t be shut down – oh and the fact that there wasn’t a containment structure in place (there are such structures surrounding the reactors in Japan). In short, we learned Tuesday that the worst-case scenario in Japan isn’t anything even remotely similar to what happened in Chernobyl.

In addition, we learned all sorts of little tidbits about Japan and its impact on the global economy on Tuesday. For example, those who believe the economic problems in Japan are going to become a contagion and drag the global economy down need to remember that Japan is an export-driven economy. So, while the multiple disasters in Japan could definitely create problems in terms of the supply of goods they export, imports aren’t a concern. In fact, the WSJ reported Tuesday that Japan bought just 4.7% of total U.S. exports in 2010. And Japan accounted for a whopping 0.4% of U.S. GDP last year.

So, while the stock market clearly remains in a downtrend, our take on the tea leaves is we managed to move away from panic-mode on Tuesday. And although a further bounce, a retest of the low at some point, and then some backing and filling would be logical (the order of which is not preordained), we probably won’t have to read between the lines to figure out what the market’s focus will be going forward. After all, if you remove the threat of a nuclear meltdown, we’re back to what James Carville once so famously said…

Turning to this morning… Although Japanese stocks rebounded strongly (Nikkei 225 +5.68%), the deterioration in the situation at the Fukushima nuclear power plant as well as an escalation in the clashes in Bahrain has limited the upside potential so far in the European markets an

On the Economic front… The labour Department reported the Producer Price Index (an indication of inflation at the wholesale level) for February rose by +1.6%, which was above the consensus estimate for +0.6% and above January’s +0.8%. When you strip out food and energy, the so-called Core PPI came in up +0.2%, which was in line with the consensus for +0.2% and below January’s +0.5%.

Next up, Housing Starts fell by 22.5%% in February to an annualized rate of 479K. This was below the consensus for 564K. Building Permits for February fell 8% to 517K. This was also below the consensus of 569K and last month’s reading of 563K.

Thought for the day: Don’t forget, ego is the real enemy in this game…

Pre-Game Indicators

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

  • Major Foreign Markets: Australia: +0.74% Shanghai: +1.20% Hong Kong: +0.10% Japan: +5.68% France: -0.15% Germany: +0.37% London: -0.51%
  • Australia: +0.74%
  • Shanghai: +1.20%
  • Hong Kong: +0.10%
  • Japan: +5.68%
  • France: -0.15%
  • Germany: +0.37%
  • London: -0.51%
  • Crude Oil Futures: +$1.76 to $98.94
  • Gold: +$11.10 to $1403.90
  • Dollar: higher against the Yen and Euro, lower vs. Pound
  • 10-Year Bond Yield: Currently trading at 3.277%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value): S&P 500: -3.87 Dow Jones Industrial Average: -21 NASDAQ Composite: -4.32
  • S&P 500: -3.87
  • Dow Jones Industrial Average: -21
  • NASDAQ Composite: -4.32

Wall Street Research Summary


  • Carrizo Oil & Gas (CRZO) – Canaccord Genuity
  • BB&T Corp (BBT) – Deutsche Bank
  • Cummins (CMI) – Mentioned positively at GOldman Sachs
  • Fairchild Semiconductor (FCS) – JPMorgan
  • Polypore (PPO) – Stifel Nicolaus
  • CunturyLink (CTL) – Stifel Nicolaus
  • Frontier Communications (FTR) – Stifel Nicolaus
  • Liberty Global (LBTYA) – Stifel Nicolaus
  • Marathon Oil (MRO) – UBS
  • Noble Energy (NBL) – UBS


  • Las Vegas Sands (LVS) – Argus Research
  • IBM (IBM) – Bernstein
  • Nokia (NOK) – Danske Bank
  • Hercules Offshore (HERO) – FBR Capital
  • AGCO Corp (AGCO) – Goldman Sachs
  • Apple (AAPL) – JMP Securities
  • Energy Conversion (ENER) – Morgan Stanley
  • FedEx (FDX) – Target reduced at UBS

Long positions in stocks mentioned: AAPL

For more “top stock” portfolios and research, visit

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. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of TopStockPortfolios and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. Stocks should always consult an investment professional before making any investment.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered with the U.S. Securities and Exchange Commission as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.