Two Words To Sum Up The Stock Market: Fear And Momentum

Daily State of the Markets  
Monday Morning – March 7, 2011

Good morning. I believe there are two words that best sum up the current up-one-minute, down-the-next environment in the stock market: Fear and Momentum. Cutting to the chase, stock and oil traders alike seem to be fixated on the fear of what might happen to the world’s supply of crude, and in turn, the resulting impact on the global economy. And although the U.S. has a couple of barrels laying around in reserve and Saudi Arabia has the capacity to double Libya’s production in the blink of an eye, traders appear to be focused only what can go wrong.

Don’t get me wrong; I completely understand the concept of the “risk premium” that is being applied to the price of crude oil on a daily basis. You don’t need much of an imagination to figure out what is going to happen to both oil prices and the economy should the current civil unrest that is occurring in Libya, Tunisia, Bahrain, etc. spread into Saudi Arabia or Iran. And with a “day of rage” planned in the House of Saud for March 11th, the fear of what could/might happen is certainly on the rise.

The other issue at play here is the momentum trade. If you’ve ever read anything about Richard Dennis’ “turtles,” you likely understand what I’m talking about. The “turtles,” as they were called, were all given the exact same set of rules and training from legendary commodities trader Richard Dennis and then turned loose to trade. The initial goal was to settle a bet between Dennis and his partner as to whether great traders were born or “made.” Dennis felt that traders could be taught and gave the newbie turtles everything they needed to be successful in the commodities markets.

While the following represents a complete butchering of the trading system utilized by the turtles, it will suffice to say that when a commodity broke out, the turtles, as well as the legions of traders who today trade based on technical analysis, added to their positions. And with oil prices breaking out on Friday (check out a weekly chart of USO and you’ll see what I mean), it is a safe bet to say that momentum-based traders were effectively “piling on” into the close of oil prices on Friday.

Looking only at the chart of crude, one could easily argue that oil has another $35 or so to climb. Thus, if the fear of what could happen escalates or there is even a hint that Saudi’s oil supply could be at risk, the momentum crowd will continue bombing into the oil contracts.

But as a card carrying member of the glass-is-at-least-half-full club, I’d be remiss if I didn’t bring up what’s missing here. While traders have become quite adept at identifying all the things that can go wrong, they appear to be almost completely incapable of seeing what can go right. (Gee, do you think this has anything to do with the fact that most of the “fast money” completely missed the housing/mortgage bubble? Remember, the average hedge fund lost more than -20% in 2008!)

So, what can go right here? Hmmm… How about Gadhafi being forced out? How about the “Days of Rage” being a bust for the protesters in Saudi Arabia? What happens if the oil supply isn’t interrupted? What about Obama’s idea to use the Strategic Oil Reserves? And just like the Central Bankers of the world worked together to save the day during the various banking crises lately, what about the idea of the leaders of the G-8/20 getting together to make sure that oil doesn’t push the global economy off the cliff the bears are talking about?

I know, I know, I’m a dreamer. But since this game is about staying on the right side of the major trend, I thought it might be a good idea to spend just a moment or two thinking about how the world doesn’t come to an end here. But I’m over it now; let’s buy some oil!

Turning to this morning… Despite the downgrade of Greece’s sovereign debt rating, air attacks on rebel forces in Libya, and the price of oil pushing above $106, both European stock markets and U.S. stock futures seem to be holding up fairly well at the current time.

On the Economic front… We don’t have any economic data to review before the bell today. But we will get a report on Consumer Credit at 3:00 pm eastern.

Thought for the day: Just for fun, try smiling at everyone you meet today…

Pre-Game Indicators

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


Major Foreign Markets:

  • Australia: -1.26%
  • Shanghai: +1.86%
  • Hong Kong: -0.41%
  • Japan: -1.76%
  • France: +0.09%
  • Germany: +0.34%
  • London: +0.40%


Crude Oil Futures: +$2.37 to $106.79 Gold: +$16.10 to $1447.70 Dollar: higher against the Yen, lower vs. Euro and Pound 10-Year Bond Yield: Currently trading at 3.537   Stocks Futures Ahead of Open in U.S. (relative to fair value): S&P 500: +0.55 Dow Jones Industrial Average: +1 NASDAQ Composite: +4.79 

Wall Street Research Summary


Amdocs (DOX) – BofA/Merrill PPL Corp (PPL) – Barclays ConocoPhillips (COP) – Citi Whirlpool (WHR) – Mentioned positively at Cowen Penn National (PENN) – Target increased at Goldman, but sell rating retained Pinnacle Entertainment (PNK) – Target increased at Goldman, but sell rating retained PACCAR (PCAR) – JPMorgan Atlas Energy (AHD) – Morgan Stanley Atalas Pipeline Partners (APL) – Morgan Stanley Starbucks (SBUX) – Morgan Stanley CA Technologies (CA) – Oppenheimer Brinker (EAT) – UBS Intel (INTC) – Top pick in semi space at Wells Fargo 


Janus Capital (JNS) – BofA/Merrill WMS Industries (WMS) – Goldman Boyd Gaming (BYD) – Goldman Nationwide Health (NHP) – Wells Fargo Semiconductor Sector – Downgraded at Wells Fargo 

Long positions in stocks mentioned: INTC

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