Running Out Of Reasons?

Daily State of the Markets 
Thursday Morning – August 18, 2011

Good morning. During the height of the recent summer swoon, there were lots of reasons to buy – for a trade, anyway. For starters, with the market having fallen something on the order of -16% in eleven days, the fast-money crowd knew that buying into such a debacle was an odds-on trade. In short, unless the sky was really falling, traders could bet that an outsized bounce was likely to be the next order of business. And with leaflets falling from the sky explaining the wonderful opportunity presented by such waterfall declines, traders were anxious to pull the trigger on the “big bounce” trade.

Next, the folks dressed in their bear costumes who had been short during the 11-day dive, likely grew more interested in covering with each passing 500-point down day. And of course, if you actually held short positions, buying was the way to take your profits.

Then there were the bargain hunters – the long-only mutual fund managers. Since their prospectus tells most mutual fund managers that they have to stay nearly fully invested at all times (and why exactly is that a good idea?), these guys have learned to buy the dips as a way to try and provide outperformance versus the S&P 500. (And remember, that’s how fund managers earn their bonuses.)

And finally there are the loveable geeks and their computers, aka “the quants.” If you have an understanding of the way this crowd works, you will never again be surprised when the market turns on a dime for no apparent reason. You see, a large number of what Warren Buffett calls “geeks bearing formulas” program their supercomputers to scan markets around the globe for misaligned pricing situations. So, when a dive occurs that is out of the ordinary, the computers start screaming “buy ’em!”

But at this stage of the game, I can’t help but wonder if the buyers have run out of reasons. While it seems like everybody on the planet knew what a great buying opportunity was presented six days ago, I’ll bet that these same people know about the retest that tends to occur in this type of market. And if you’ve studied your “waterfall decline” charts, you know that the retest tends to occur within three weeks of the initial low. And guess what, we’re already in week number two!

Please understand that I am NOT saying that stocks will start heading lower immediately. No, if I’ve learned anything in my career it is that Ms. Market can do any darn thing she pleases, at any time she pleases. And I will go so far as to say that the market has actually traded fairly well this week.

However, there are also some nagging issues that keep me leaning toward the running-out-of-reasons camp. First of all, my momentum indicators are a pretty pathetic bunch these days. In short, I would have expected to see a little more oomph out of the “big bounce” phase. And while that may still be ahead, I’d at least like to see our trend-and-breadth confirm models turn green before breaking into a chorus of “We’re in the money.”

I’m also a little confounded by our sentiment models. While the markets surely became oversold and everybody talked about all the fear, my market sentiment indicators didn’t exactly fall off of a cliff. In fact, one of our most trusted models designed to gauge investor sentiment didn’t even approach the lows seen during the 2010 edition of “our summer of discontent” (which was nowhere near the lows seen in 2009, or even back in 2003 – heck the indicator is still above the 2006 lows). So, I still am having some trouble with the pronouncement that this is the buying opportunity of a lifetime here.

I know, I know, it appears that I’ve accidentally donned my Debbie Downer hat this morning. I promise that this was not my intention. I guess I’m just a little sceptical about the potential for anything more than a “big bounce” at this point. Then again, stranger things have happened and I promise to follow my systems that are designed to keep me on the right side of the important trends. And while I’m waiting for my indicators to perk up, I’ll be watching to see if the buyers can come up with any new reasons to click the buy button.

Turning to this morning… A report out of Morgan Stanley cutting their global GDP forecasts as well as modest signs of bank stress in the Eurozone have put global markets on their heels and has pushed S&P futures in a southerly direction.

On the Economic front… The Consumer Price Index for July jumped by +0.5%, which was well above the consensus estimates for an increase of +0.2%. When you strip out food and energy, the so-called Core CPI came in with a gain of +0.2%, which was in line with expectations for +0.2% and below June’s +0.3%.

Initial Claims for Unemployment Insurance for the week ending 8/13 rose by 9,000 to 408K, which was worse the consensus estimate for 400K and last week’s revised total of 399K. Continuing Claims for the week ending 8/6 came in at 3.702M vs. 3.698M and last week’s 3.695M.

Thought for the day… Laughter is actually great exercise – it’s like jogging for the soul…

Pre-Game Indicators

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

  • Major Foreign Markets: Australia: -1.20% Shanghai: -1.61% Hong Kong: -1.34% Japan: -1.25% France: -2.83% Germany: -3.74% Italy: -3.91% Spain: -3.30% London: -2.33%
  • Australia: -1.20%
  • Shanghai: -1.61%
  • Hong Kong: -1.34%
  • Japan: -1.25%
  • France: -2.83%
  • Germany: -3.74%
  • Italy: -3.91%
  • Spain: -3.30%
  • London: -2.33%
  • Crude Oil Futures: -$2.35 to $85.23
  • Gold: +$18.90 to $1812.70
  • Dollar: higher lower the Yen, higher vs Euro and Pound
  • 10-Year Bond Yield: Currently trading at 2.101%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value): S&P 500: -27.90 Dow Jones Industrial Average: -219 NASDAQ Composite: -49.6
  • S&P 500: -27.90
  • Dow Jones Industrial Average: -219
  • NASDAQ Composite: -49.6

Wall Street Research Summary


  • Edison International (EIX) – Bernstein
  • Tyco (TYC) – Bernstein
  • Ryland (RYL) – Deutsche Bank
  • Tenneco (10) – Goldman Sachs
  • BorgWarner (BWA) – Goldman Sachs
  • Bally Technologies (BYI) – Goldman Sachs
  • WMS Industries (WMS) – Goldman Sachs
  • Biogen Idec (BIIB) – Oppenheimer
  • Domino’s Pizza (DPZ) – Oppenheimer
  • McDonald’s (MCD) – Oppenheimer
  • Panera Bread (PNRA) – Oppenheimer
  • Canadian Solar (CSIQ) – Piper Jaffray
  • UDR Inc (UDR) – RBC Capital
  • Abercrombie & Fitch (ANF) – RW Baird
  • Brookfield Properties (BPO) – Stifel Nicolaus
  • Mack-CAli Realty (CLI) – Stifel Nicolaus


  • Honeywell (HON) – Bernstein
  • Ingersoll-Rand (IR) – Bernstein
  • TRW Automotive (TRW) – Goldman Sachs
  • Goodyear Tire (GT) – Goldman Sachs
  • Starbucks (SBUX) – Oppenheimer
  • Sonic (SONC) – Oppenheimer
  • Texas Roadhouse (TXRH) – Oppenheimer
  • BE Aerospace (BEAV) – RBC Capital
  • HCP (HCP) – RW Baird
  • ProLogis (PLD) – Stifel Nicolaus

Long positions in stocks mentioned: MCD, PNRA

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


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