Searching For The Truth

Daily State of the Markets 
Wednesday Morning – August 17, 2011

Good morning. Whenever the market makes a big move that is followed by an enthusiastic move in the opposite direction, the key question to ask is, which one is real? As such, I’m of the mind that the market is currently searching for “the truth,” or the appropriate level for the moving target that is the current macroeconomic backdrop.

The quick -16.8% dive on the S&P 500 that occurred in the 11 trading days between July 22nd and August 8th was clearly driven by the realisation that the economic environment was not as solid as had been assumed. And I suppose we should also credit the fear of “what could happen next,” given everything else that was going on around the world. But the big driver was the downward revision to Q1’s GDP because it caused traders to recognise that the economy never achieved “escape velocity” and that there wasn’t much potential for meaningful job growth in the near term.

However, the thing I kept hearing repeatedly from some very experienced people was that the recent 11-day dance to the downside was like nothing they’d ever seen before – and yes, a lot of these folks (including yours truly) were around for the very first adventure with computers during October 1987. Thus, I’m going to submit that at least a teensy part of the decline might have been attributable to man and his machines (or in this case, the quants and their algorithms).

To say that Wall Street tends to overdo things in both directions is perhaps the understatement of the millennium. So, given the depths to which stocks had plunged over such a brief period of time, a bounce – even one of the deceased feline variety – was to be expected. While there was a false start involved, stocks stuck to the script and quickly bounced up to the tune of +7.5% over three days. And although the bounce has not been nearly as intense as the decline, you’ve got to admit that a quick pop of 7.5% to the good ain’t bad.

I will also submit for your consideration the idea that the bounce may not be over. As we talked about yesterday, the average bounce up from the “emotional low” that typically occurs within a waterfall decline pattern tends to be about 10%. Therefore, the bulls might have some room to run – to say, somewhere in the 1231 zone (which is also conveniently close to the .50 Fibonacci retracement level at 1229).

To make my point, let’s assume that the bulls can achieve this target and maybe even push the indices a little higher given the propensity for the computers to get carried away. From there, the waterfall script says that we should get a retest, which, in my humble opinion, would represent a search for the appropriate level given the evolving economic backdrop – aka “the truth.”

In sum, it is fairly obvious that a 17% decline over 11 days might have been overdone. And it is safe to say that a bounce of 10% in a short time might also be a bit excessive. So, once we get the hysterics out of the way, the traders and the investors will likely battle it out until “the truth” presents itself.

But then again, I guess the computers could just keep reacting willy-nilly to each and every headline. Although this ride is likely to be bumpy and could be a little on the wild side, the truth just might reveal itself with this approach as well. It just might be harder to see with your head being whipped up and down on an hourly basis!

Turning to this morning… Recent volatility appears to have faded away as things are fairly quiet so far in the early going. Futures are pointing to a modestly higher open.

On the Economic front…The labour Department reported the Producer Price Index (an indication of inflation at the wholesale level) for July rose by +0.2%, which was above the consensus estimate for a gain of +0.1%.

When you strip out food and energy, the so-called Core PPI came in at +0.4%, which well above the consensus for +0.2% and above June’s +0.3%.

Thought for the day… Resist the temptation to tell people only what they want to hear…

Pre-Game Indicators

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

  • Major Foreign Markets: Australia: +1.26% Shanghai: -0.26% Hong Kong: +0.38% Japan: -0.55% France: +0.86% Germany: -0.13% Italy: +0.79% Spain: +0.53% London: -0.31%
  • Australia: +1.26%
  • Shanghai: -0.26%
  • Hong Kong: +0.38%
  • Japan: -0.55%
  • France: +0.86%
  • Germany: -0.13%
  • Italy: +0.79%
  • Spain: +0.53%
  • London: -0.31%
  • Crude Oil Futures: +$1.42 to $88.08
  • Gold: +$4.20 to $1789.20
  • Dollar: higher against the Yen, lower vs Euro and Pound
  • 10-Year Bond Yield: Currently trading at 2.235%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value): S&P 500: +5.19 Dow Jones Industrial Average: +39 NASDAQ Composite: +2.75
  • S&P 500: +5.19
  • Dow Jones Industrial Average: +39
  • NASDAQ Composite: +2.75

Wall Street Research Summary


  • Pan Am Silver (PAAS) – Canaccord Genuity
  • Hospira (HSP) – Citi
  • Coinstar (CSTR) – Mentioned positively at Piper Jaffray
  • Hain Celestial (HAIN) – RBC Capital
  • HealthSouth (HLS) – Mentioned positively at RW Baird
  • Towers Watson (TW) – Stifel Nicolaus
  • Office Depot (ODP) – UBS
  • Vertex Pharmaceuticals (VRTX) – William Blair


  • Regeneron Pharmaceuticals (REGN) – BofA/Merrill
  • Hewlett-Packard (HPQ) – BMO Capital
  • First Solar (FSLR) – Goldman Sachs
  • Digital River (DRIV) – Morgan Stanley

Long positions in stocks mentioned: none

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


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