Time For Act II?

Daily State of the Markets 
Tuesday Morning – August 23, 2011

Good morning. About the only positive one can take away from the current stock market environment is that we’ve seen this play before. And assuming that the market will continue to follow the script, there are two bits of good news to relay this morning. First and foremost, in the end, nobody dies. And second, based on what we’re seeing right now, it just might be time for intermission, which, of course, will be followed by Act II.

In case you aren’t following what might only loosely qualify as an analogy, we’re talking about the idea that the stock market is currently following a waterfall decline pattern. And while everybody knows that history doesn’t repeat exactly, we can say from experience that these kinds of markets do tend to rhyme rather nicely.

In studying the scripts of previous waterfall declines, we will warn you that Act II tends to start off a little on the slow side. After the drama of the initial dive, the panic low, the “big bounce,” and then the retest, the next phase – the recovery – can be considered downright dull. But I’m guessing that most investors might welcome some “dull” upside action right about now.

But first, I must issue an important caveat: We could be wrong here. You see, if traders are treated to an overly negative headline or even a hint that any of the current crises are worsening, Act II could quickly be cancelled. And if the indices should break through their August 8-10 lows, we might have to go back a few scenes and start over.

So, with the appropriate disclaimer now in place, let’s proceed. Based on the assumption that we’ve seen the emotional low and perhaps the “big bounce” and even the retest (fingers crossed on the last two), we can expect to see a meaningful rally commence in the near-term. If this market sticks to the script, this rally will be different than the “big bounce” in that it is likely to be far less violent and might even contain a modest setback or two along the way.

The key though is that these rallies tend to last several months, which makes them “playable” for even those of us that don’t utilise a computer to trade the headlines. And if the 200-day moving average was rising at the time the waterfall decline began, the ensuing rally tends to be even better as the indices usually resume the trend that was in place before the dive began. So, if we want to get creative, we could argue that the Act II might become a nice lead-in to the traditional year-end rally.

Yes, it is true that I’ve gone on record as saying that it might be possible for things to be different this time around and that even the waterfall pattern might wind up deviating from the traditional course. However, if this market continues to follow the script, you might want play along because Act II tends to be very rewarding.

Turning to this morning… While China’s Flash PMI came in with a reading below 50 (representing contraction), it was above expectations. In addition, the preliminary PMI readings for Europe were not disastrous. Thus, traders are breathing a sigh of relief and sending markets and U.S. futures northward.

On the Economic front… There is no data scheduled for release before the opening bell but we will get a report on New Home Sales at 10:00 am eastern.

Thought for the day… Instead of just muddling through, why not make a concerted effort to enjoy the day?

Pre-Game Indicators

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

  • Major Foreign Markets: Australia: +2.14% Shanghai: +1.52% Hong Kong: +1.99% Japan: +1.22% France: +1.26% Germany: +0.89% Italy: -0.07% Spain: +0.57% London: +0.89%
  • Australia: +2.14%
  • Shanghai: +1.52%
  • Hong Kong: +1.99%
  • Japan: +1.22%
  • France: +1.26%
  • Germany: +0.89%
  • Italy: -0.07%
  • Spain: +0.57%
  • London: +0.89%
  • Crude Oil Futures: +$1.24 to $85.66
  • Gold: -$10.00 to $1881.90
  • Dollar: higher against the Yen, lower vs Euro and Pound
  • 10-Year Bond Yield: Currently trading at 2.149%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value): S&P 500: +13.73 Dow Jones Industrial Average: +116 NASDAQ Composite: +22.27
  • S&P 500: +13.73
  • Dow Jones Industrial Average: +116
  • NASDAQ Composite: +22.27

Wall Street Research Summary


  • Hawaiian Airlines (HA) – BofA/Merrill
  • US Airways Group (LCC) – BofA/Merrill
  • AMR Corp (AMR) – BofA/Merrill
  • Kimberly Clark (KMB) – Barclays
  • Ryland Group (RYL) – Credit Suisse
  • Lindsay Corp (LNN) – Janney
  • Sanderson Farms (SAFM) – JPMorgan
  • Werner Enterprises (WERN) – Morgan Keegan
  • Juniper Networks (JNPR) – Morgan Keegan
  • Dick’s Sporting Goods (DKS) – Mentioned positively at Oppenheimer
  • Alkermes (ALKS) – UBS
  • NRG Energy (NRG) – UBS


  • Madison Square Garden (MSG) – BofA/Merrill
  • Walgreens (WAG) – Barclays
  • CNOOC (CEO) – Bernstein
  • Sinopec (SNP) – Bernstein
  • Hormel Foods (HRL) – BMO Capital
  • Lincare Holdings (LNCR) – Citi
  • Netflix (NFLX) – Target cut at Merriman Capital
  • Thomas & Betts (TNB) – Target cut at Oppenheimer
  • Suntech Power (STP) – ThinkEquity
  • Public Service (PEG) – UBS
  • Rockwell Collins (COL) – Wedbush Securities

Long positions in stocks mentioned: none

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


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