Daily State of the Markets
Wednesday Morning – September 28, 2011
Good morning. During normal times, if indeed there ever are such times in the stock market, it is often difficult to make sense of the market’s wiggles and giggles. One day the market can be up and the next down. Moves can start – and stop – on a dime or sometimes a single headline. But such is life in the game that is played out daily at the corner of Broad and Wall. Nobody ever said this business was easy!
It is also said that markets tend to “trade” on headlines and “trend” on fundamentals. Thus, if one can keep the major trend, or what I like to call, the environment, in mind, they have a decent shot at “getting it right” in terms of their overall risk management strategy. And it is for this reason that I spend an inordinate amount of time trying to determine the drivers behind market moves.
However, nowadays it is difficult to identify the trade from the trend as the machines trying to scalp fractions of a penny millions of times a minute account for more than 70% of the daily volume. Thus, there are times when the market displays no memory from one trade, trend, or even day, to the next.
The current market environment is a good example of this concept. If you have a moment, think back to the last couple of “trends” the market has seen. Let’s go back – way back – to two weeks ago. If my memory serves (truly a question mark at times, I’m told), the stock market enjoyed a rare five-for-five week in which the major indices advanced each and every session and the venerable DJIA put up a solid 500+ point gain. The reason behind the move was simple: the data showed that the U.S. was NOT in a recession. Thus, it was easy to conclude that the economic outlook was the driver of the indices.
Now let’s fast-forward the tape to last week when the market gave back all of the five-for-five gains and then some as the Dow shed 775 points through Thursday. Why the sudden and relatively severe dance to the downside, you ask? Oh, that’s right; some reliable economic data (PMI’s) showed that economic activity was slowing in China and Europe. And given that most companies are global these days, a slowing global economy is not exactly what the doctor ordered for future earnings. Thus, once again, it appears that it was the macroeconomic outlook that drove the market.
So, let’s see… We had five straight up days based on good economic data followed by four scary down days sponsored by weak economic data. So naturally, what would we expect next? More movement in response to new economic inputs? Nah, that would be too easy. How about three straight up days based on rumours (which, of course, have been denied) of a grand solution that is in the works for the Eurozone debt crisis? Thus, it appears that the global macro picture is now, well, out of the picture.
Never mind that fact that the last grand solution (the expansion of the EFSF), which was approved on July 21, hasn’t even been voted on yet. Never mind the fact that the leveraging of the EFSF (a big part of the new grand plan) appears to be deemed unconstitutional by Germany or that Angela Merkel is having a tough enough time getting the old, new grand plan passed. Never mind that up to 7 of the 17 countries appear to be balking at the terms of the latest and greatest bailout of Greece. Never mind the fact that all seventeen countries will have to first agree to and then vote on any new grand plan. Never mind the fact that it could take months for all of the above to occur. And never mind the fact that the crummy economic environment hasn’t changed a bit.
My guess is that the boyz and their computer toys might be guilty of being a tad over anxious to catch (or even create) the absolute bottom of this move and this explains the A.D.D.-style change in focus. And if the grand solution comes to fruition, I’m guessing stocks could run a ways. But at the end of the day (or the next move to the top of the trading range), traders may return to the question of the economic outlook. And all we can hope for is that the data will cause us to say, “Slowdown? What slowdown?”
Turning to this morning… With Finland passing the new EFSF agreement, it’s one down, sixteen more votes to go. Also in the news, the troika’s analysts return to Greece tomorrow to determine if the country has met its obligations needed to get the next tranche of aid. European markets are mixed and the futures in the U.S. are once again pointing higher. And why not, the end of the quarter is almost here.
On the Economic front… The Commerce Department reported that Durable Goods orders declined by -0.1% during the month, which was below the consensus expectations for an increase of +0.1%. When you strip out the volatile orders for transportation, orders fell by -0.1%, which was above the consensus for -0.2%. The July reading was revised lower to +0.7%.
Thought for the day… Never forget that the first rule of life, medicine, and money management is to do no harm…
Here are the Pre-Market indicators we review each morning before the opening bell…
- Major Foreign Markets: Australia: +0.84% Shanghai: -0.96% Hong Kong: -0.66% Japan: +0.02% France: -0.02% Germany: +0.49% Italy: -0.08% Spain: -0.10% London: -0.40%
- Australia: +0.84%
- Shanghai: -0.96%
- Hong Kong: -0.66%
- Japan: +0.02%
- France: -0.02%
- Germany: +0.49%
- Italy: -0.08%
- Spain: -0.10%
- London: -0.40%
- Crude Oil Futures: -$0.78 to $83.67
- Gold: -$0.20 to $1652.30
- Dollar: higher against the Yen, lower vs. Euro and Pound
- 10-Year Bond Yield: Currently trading at 1.985%
- Stock Futures Ahead of Open in U.S. (relative to fair value): S&P 500: +6.52 Dow Jones Industrial Average: +62 NASDAQ Composite: +13.4
- S&P 500: +6.52
- Dow Jones Industrial Average: +62
- NASDAQ Composite: +13.4
Wall Street Research Summary
- Leap Wireless (LEAP) – Bernstein
- Ivanhoe Mines (IVN) – BMO Capital
- Smithfield Foods (SFD) – BMO Capital
- Auxilium Pharmaceuticals (AUXL) – Citi
- Apple (AAPL) – Estimates increased at Jefferies
- Meadwestvaco (MWV) – JPMorgan
- Neogen (NEOG) – Stephens
- Jabil Circuit (JBL) – Estimates and target increased at UBS
- Masco (MAS) – UBS
- Teekay Tankers (TNK) – BofA/Merrill
- Sunoco (SUN) – Target cut at Barclays
- MetroPCS Communications (PCS) – Target cut at Bernstein
- Ralph Lauren (RL) – Citi
- Colgate-Palmolive (CL) – Citi
- Kimberly-Clark (KMB) – Citi
- Mead Johnson Nutrition (MJN) – Citi
- New York Community Bancorp (NYB) – Susquehanna
Long positions in stocks mentioned: AAPL, MJN
For more of Mr. Moenning’s thoughts and research, visit StateoftheMarkets.com
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