Signs The Market Lacks Conviction

Daily State of the Markets 
Thursday Morning – May 26, 2011

Good Morning. Stocks spent much of Wednesday’s session doing a lot of nothing. After opening lower on the back of renewed concerns about Greece (btw, does anybody else wish that Greece would just default already and get it over with?) and a fairly ugly Durable Goods report, the indices looked like they were breaking down on a chart-basis. But right about the time things were starting to get nasty, the Euro rallied, the dollar fell, and as you might be able to surmise, stocks bounced.

Although it was nice to see the rebound, we were more than a little annoyed to see “the trade” back in control. After all, the quick bounce wasn’t in response to any news, earnings, or technical level. No, it was a computer-driven trade based on a foreign currency. I know that I’ve been whining about this for a while now. But as I’ve been saying, the mindless movements in stock prices in response to the ups and downs of the Euro make it nearly impossible to have any type of conviction about what to do next.

While I am quite confident that this trade will eventually give way to investments once again being based on silly little things like earnings or the economy, the bottom line is there appears to be little conviction – in either direction – toward this market.

The bear camp will likely take offence at this idea as our furry friends can probably come up with any number of reasons why stocks could and should move lower as the year progresses. Yet at the same time, it strikes me as odd that those in the glass-is-half-empty camp haven’t been able to get much of anything done with their opportunities lately. Let’s face it; the bears have had some great chances this month. But so far, all they have to show for their efforts is a run-of-the-mill consolidation.

Then there is the bull camp. Although there are a handful of positives that can be tossed out to justify the wearing of the rose-coloured Revo’s, our heroes in horns have also clearly lacked conviction over the past three months (yes fans, the stock market HAS been going sideways for three months now). Thus, I’m of the mind that it won’t be too much longer before investors begin to take a stand in one direction or the other.

I saw a good example of conviction on CNBC after the close yesterday. Some gal from MKM Partners was on talking about how positive it is that stocks have managed to become oversold without actually enduring much selling. She reminded the audience that the best rallies always begin with the market having reached an oversold condition and therefore she was optimistic about the prospects for the next rally.

Although I am not an investor that likes to make predictions (remember, this game is about staying in tune with what IS happening, not making headlines with your prognostications), I did appreciate this analyst’s enthusiasm. And given the way the market has been trading lately, she may be right. If the bulls (or the bears, for that matter) can create some conviction for their cause amongst the troops, there is a decent chance that the current sideways malaise would come to an end.

In closing, I’m of the mind that “the trade” will end when we start to see some conviction return to the market. Unfortunately though, I’m really not sure if there is much of it out there at the present time. But I will promise to keep looking.

Turning to this morning… Although the overseas markets had modestly positive returns, traders in the U.S. have been waiting on some important data on the economy and jobs. So, let’s get to it…

On the Economic front… Initial Claims for Unemployment Insurance for the week ending 5/21 rose by 10K to 424K. This was above the consensus estimate for 402K and last week’s total of 414K. Continuing Claims for the week ending 5/14 came in at 3.690M vs. 3.700M and last week’s 3.736M.

Next up, the government’s first revision of the nation’s first quarter GDP shows the economy did not improve as many had expected, growing at an annualized rate of +1.8% during the quarter. This was below the estimates for a growth rate of +2.0% and in line with the initial report’s +1.8%.

Thought for the day… Never forget that the first rule of life, medicine, and money management is to do no harm…

Pre-Game Indicators

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

  • Major Foreign Markets: Australia: +1.58% Shanghai: -0.24% Hong Kong: +0.67% Japan: +1.48% France: +0.17% Germany: -0.32% London: +0.44%
  • Australia: +1.58%
  • Shanghai: -0.24%
  • Hong Kong: +0.67%
  • Japan: +1.48%
  • France: +0.17%
  • Germany: -0.32%
  • London: +0.44%
  • Crude Oil Futures: -$0.07 to $101.25
  • Gold: -$7.50 to $1519.20
  • Dollar: higher against the Yen, lower vs Pound and Euro
  • 10-Year Bond Yield: Currently trading at 3.143%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value): S&P 500: +1.40 Dow Jones Industrial Average: +4 NASDAQ Composite: +0.85
  • S&P 500: +1.40
  • Dow Jones Industrial Average: +4
  • NASDAQ Composite: +0.85

Wall Street Research Summary


  • cognisant Technology (CTSH) – Barclays
  • Fifth Third (FITB) – Bernsetin
  • NetApp (NTAP) – BMO capital
  • Watson Pharmaceuticals (WPI) – Estimates and target increased at Citi
  • Comcast (CMCSA) – Added to Top Picks at Citi
  • Aeropostale (ARO) – FBR Capital
  • American Eagle (AEO) – FBR Capital, Lazard
  • Host Hotels (HST) – Goldman Sachs
  • Ardea Biosciences (RDEA) – Mentioned positively at Oppenheimer
  • Comerica (CMA) – Oppenheimer
  • C.H. Robinson (CHRW) – Target increased at RBC Capital
  • Immucor (BLUD) – RBC Capital
  • Oracle (ORCL) – ThinkEquity
  • CNH Global (CNH) – UBS
  • AGCO Corp (AGCO) – UBS


  • CSC (CSC) – Barclays
  • Diamond Foods (DMND) – BMO capital
  • Advance Auto Parts (AAP) – Credit Suisse
  • Lululemon (LULU) – FBR Capital
  • Radio Shack (RSH) – Goldman Sachs
  • Walgreens (WAG) – Goldman Sachs
  • WMS Industries (WMS) – JPMorgan
  • Gen Probe (GPRO) – JPMorgan

Long positions in stocks mentioned: RDEA

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