Friday Morning – September 30, 2011
Good morning. As I have mentioned a time or 20, I have a compulsive need to understand the driving forces behind big(ish) moves in the stock market. Nine times out of 10 it is fairly easy to connect the dots and identify the catalyst for a meaningful move. But then there are days like Thursday when one is left scratching their head. And while it would be easy to pass off yesterday’s 300+ point move on the Dow from high to low and then its 190 point move up in the last hour as just more of the same market volatility we’ve seen lately, that simply doesn’t cut it in my book.
The early moves were easy to follow and understand. As my son opined just after the market’s opening bell rang, “When was the last time we got good news out of Europe and the U.S. on the same day? No wonder we popped at the open!” To be sure, traders started the day with a smile (perhaps it was all the free coffee!) in response to a vote in Germany that did not plunge the Eurozone into chaos and a couple of economic reports in the U.S. that were – wait for it – better than expected. Now there’s a phrase we haven’t used in a while.
But then it started. Over the next hour, the Dow moved steadily lower, managing to give up about 130 points in the process. Apparently Advanced Micro (AMD) ruined the mood by cutting its revenue and profit margin guidance. The stock plunged and took the semiconductor index, the NASDAQ, and ultimately the blue chip indices down with it. In short, the action was starting to get ugly.
So, with NASDAQ now sporting a big red number while the DJIA was still up triple digits, the market board definitely looked a little strange. This, as it turned out, was just the beginning of the strangeness.
In scanning my institutional-oriented growth portfolio, I saw that the leading stocks were also taking it on the chin. Names like Fossil, PriceLine, Autozone, and Green Mountain Coffee Roasters were suddenly and without warning, down big. Heck, even the world’s coolest stock, Apple was also breaking trendlines, support zones, and moving averages. This was my clue that something was up.
We proceeded to thoroughly scan our news sources and after coming up cold, we then called everybody we knew. The conversations were brief and to the point. “Hey, whaddya got? Nothing? Yea, me too.”
Despite the fact that there was no news and nary a rumour worth repeating, the selling continued. Sure there was talk about people being down on China and discussions about what Bernanke had said earlier in the day. Yes, the Euro may have certainly been playing a role, but the correlation on the chart wasn’t spot-on enough to call it the driver. And with less than an hour to go in the session, the indices were bleeding red.
Then it happened again. Without a headline to justify the move, the major indices turned on a dime and proceeded to march steadily higher into the close, with the Dow chalking up a nearly 200 point move into the bell. Hmmm…
So, here’s the deal. Either something happened on the floor that none of the news sources picked up on or the markets were dealing with some sort of forced selling. While I have nothing but a long career to base this premise on, my assumption is that a fund was either blowing up or rumoured to be blowing up. In case you aren’t aware, Wall Street is not a friendly place if you happen to be a fund manager looking to liquidate holdings quickly. The bottom line is word gets around fast on such matters. The WSJ even published a story just this week suggesting that the vultures were circling John Paulson’s flagship hedge fund that has been hit with massive losses this year. According to the Journal article, “some traders have been selling investments they have in common with Mr. Paulson, worrying he will have to sell some holdings if clients withdraw cash.”
Other traders may be taking things a bit farther in an attempt to profit on one of their owns’ misfortune. For example, if a troubled fund has a big slug of a high-flying stock, traders may short the stock in order to profit from the forced liquidation. Nice, eh?
So, why the fierce rally into the close? If there was indeed forced selling, it appears that it ended. And if it was just a rumour, the shorts apparently ran for cover, in a hurry.
While we may never know exactly what happened on Thursday, the massive swings from high to low did not look to be “just volatility” to me and I’m betting that Wall Street’s mean streak may have been in play.
Turning to this morning… Data out of China and Japan plus word from ECRI that the U.S. is heading for recession has put the market on its heels in the early going.
On the Economic front… Personal Incomes fell by -0.1% in August, which was below the consensus expectations for an unchanged reading. Personal Spending (now called “Consumption”) for the month rose by +0.2%, which was above the expectations of +0.1% but below the revised July reading of +0.7%. Finally, the Core PCE (think inflation) came in up +0.1%, which was below expectations for +0.2% and August’s +0.2%.
In addition, we’ll get reports from Chicago PMI and UofM Sentiment later this morning.
Thought for the day… Best of luck on this Friday and be sure to enjoy the weekend!
Here are the Pre-Market indicators we review each morning before the opening bell…
- Major Foreign Markets: Australia: +0.05% Shanghai: -0.26% Hong Kong: -2.32% Japan: -0.07% France: -2.19% Germany: -2.89% Italy: -1.96% Spain: -1.42% London: -1.30%
- Australia: +0.05%
- Shanghai: -0.26%
- Hong Kong: -2.32%
- Japan: -0.07%
- France: -2.19%
- Germany: -2.89%
- Italy: -1.96%
- Spain: -1.42%
- London: -1.30%
- Crude Oil Futures: -$0.66 to $81.48
- Gold: +$6.70 to $1624.20
- Dollar: lower against the Yen, higher vs. Euro and Pound
- 10-Year Bond Yield: Currently trading at 1.934%
- Stock Futures Ahead of Open in U.S. (relative to fair value): S&P 500: -10.50 Dow Jones Industrial Average: -88 NASDAQ Composite: -23.73
- S&P 500: -10.50
- Dow Jones Industrial Average: -88
- NASDAQ Composite: -23.73
Wall Street Research Summary
- Gilmcher Realty (GRT) – BofA/Merrill
- EMC (EMC) – Mentioned positively at Lazard
- AK Steek (AKS) – Longbow Research
- Nucor (NUE) – Longbow Research
- US Steel (X) – Longbow Research
- SanDisk (SNDK) – Mentioned positively at Morgan Stanley
- Fifth Third (FITB) – Mentioned positively at Morgan Stanley
- Altera (ALTR) – Auriga
- CBL & Assoc (CBL) – BofA/Merrill
- Regency centres (REG) – BofA/Merrill
- Itron (ITRI) – BofA/Merrill
- Sotheby’s (BID) – Estimates cut at Stifel
- Micron (MU) – Wedbush Securities
Long positions in stocks mentioned: none
For more of Mr. Moenning’s thoughts and research, visit StateoftheMarkets.com
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