Daily State of the Markets
Monday Morning – October 17, 2011
Good morning. It is safe to say that the bulls have been on a roll lately. A quick glance at my weekly charts shows that the DJIA put in its second best week of the year on a closing basis last week. In addition, over the past nine trading days, the DJIA has tacked on +9.3%, the S&P is up +11.4%, the NASDAQ has popped up +14.2%, and the S&P Smallcap index has soared over +16.3%. These returns are even more impressive if you start from the low point of October 4th, the day in which “the great save” began.
From a technical standpoint, it is important to note that the S&P, Dow, and NASDAQ all closed out Friday’s session at their best levels since the big dive began on July 22nd and all of the major indices we follow are now back above their respective 50-day moving averages. Thus, the bulls were busy telling anyone that would listen on Friday that the indices are now breaking on through to the other side of the range. Taking this concept a step further, our heroes in horns inform us that the corrective phase/bear market is now over and it will be clear sailing ahead.
It is also impressive that the NASDAQ has assumed a leadership role of late. Yes, this likely due to Apple (AAPL), which closed at a brand new all-time high on Friday in response to fantastic sales numbers from the new iPhone 4S. However, the NASDAQ has broken out of its trading range, busted through its 50-day moving average and is just 7% shy of its July cycle-high.
Unfortunately, it might be best to keep the champagne on ice for the time being because there are two flys in the ointment here. First and foremost, volume has declined steadily during the advance (yes, even on the NASDAQ 100). Next, the market is now very overbought after an energetic romp to the upside over the past two weeks.
The problem is that while the S&P and DJIA did indeed appear to break out of their trading ranges, the volume on Friday was lightest of the entire rally – and the trend of volume has been down while prices have been moving up. The bottom line is this is not exactly what should be happening during a healthy advance. The technical analysis textbooks also tell us that volume should surge on an important breakout. But instead of surging on Friday, volume shrank to the lowest level of the nine-day run. In short, this just can’t be considered good action.
The key question though is will any of the above really matter? Remember, this market is being driven by two things: the idea that the European Debt crisis will be resolved by next weekend and that the U.S. economy will be just fine. Thus, we’re calling this the “hope trade” and you just can’t argue with people when they are betting on hope.
The trepidation in front of yet another defining moment in the European crisis can also explain away the lack of volume during the current run for the roses. You see, there are likely a fair amount of investors that may not view hope as a sound investment strategy. As such, those who are attempting to manage the risk of this bear market (yes, the current market qualifies as a bear due to the duration of the decline) may not be ready to blindly jump back in on the hope that Europe will get it right this time.
Don’t get me wrong, I’ve long held the belief that the powers-that-be won’t let Europe and the global banking system go down in flames. It’s just that so far they have done a lot of talking and accomplished very little.
The big point to this morning’s meandering missive is that the key to the next big move in the market still is in the hands of the politicians across the pond. Should Merkozy & Co. come up with a coordinated solution that solves the Greece problem, recapitalizes the banks, and puts an end to the credit contagion that is occurring, then the markets will likely head higher – and the lack of volume on the current advance will have been meaningless. However, if the grand plan that is expected to be presented at next weekend’s emergency EU Summit disappoints, then the indices are likely to revisit their lows – and the breakout will have been just another fakeout.
In conclusion, it is very likely that one of the important technical occurrences seen this week (the breakout and the weak volume relationship) won’t matter. Now if we could just figure out which one.
Turning to this morning… Stocks around the globe opened higher on continued hopes that a comprehensive plan to solve the European sovereign debt crisis would be presented at this weekend’s emergency EU Summit. However, word out of Germany that such a plan will not be presented and that the crisis is likely to spill over into next year has caused European markets and U.S. stock futures to turn modestly lower.
On the Economic front… The Empire Manufacturing Index (designed to indicate the state of the manufacturing sector in the New York region) for October was reported at -8.48, which was well below the consensus expectations for a reading of -4.25. This is the fifth straight sub-zerio reading for the index.
We’ll also get the report on Industrial Production and Capacity Utilization later this morning.
Thought for the day… Remember to think positive today :-)
Here are the Pre-Market indicators we review each morning before the opening bell…
- Major Foreign Markets: Australia: +1.61% Shanghai: +0.37% Hong Kong: +2.01% Japan: +1.53% France: +0.10% Germany: -0.19% Italy: +0.17% Spain: +0.33% London: +0.23%
- Australia: +1.61%
- Shanghai: +0.37%
- Hong Kong: +2.01%
- Japan: +1.53%
- France: +0.10%
- Germany: -0.19%
- Italy: +0.17%
- Spain: +0.33%
- London: +0.23%
- Crude Oil Futures: +$0.25 to $87.05
- Gold: +$5.50 to $1688.50
- Dollar: Lower against the Yen, higher vs. Euro, and Pound
- 10-Year Bond Yield: Currently trading at 2.235%
- Stock Futures Ahead of Open in U.S. (relative to fair value): S&P 500: -3.43 Dow Jones Industrial Average: -37 NASDAQ Composite: -10.69
- S&P 500: -3.43
- Dow Jones Industrial Average: -37
- NASDAQ Composite: -10.69
Wall Street Research Summary
- Family Dollar (FDO) – Barclays
- Procter & Gamble (PG) – BMO
- Vulcan Materials (VMC) – Goldman
- Caterpillar (CAT) – Goldman
- Cummins (CMI) – Jefferies
- Eaton (ETN) – Jefferies
- Joy Global (JOYG) – Jefferies
- Parker-Hannifin (PH) – Jefferies
- Timken (TKR) – Jefferies
- PPG Industries (PPG) – Susquehanna
- Dollar Tree (DLTR) – Barclays
- Veeco Instruments (VECO) – Canaccord Genuity
- Interpublic (IPG) – Deutsche Bank
- Alcoa (AA) – First Global
- Navistar (NAV) – Goldman
- Cree (CREE) – Esimtates cut at Morgan Stanley
- El Paso Pipeline Partners (EPB) – Oppenheimer
- Manitowoc (MTW) – Estimates and target cut at RBC
- Kenneth Cole (KCP) – Sterne, Agee
- Wolverine World Wide (WWW) – Sterne, Agee
- Columbia Sportswear (COLM) – Sterne, Agee
- Dick’s Sporting Goods (DKS) – Sterne, Agee
- Coca-Cola (KO) – Estimates cut at UBS
Earnings Before The Bell
Estimate Citi C $1.23 * $0.82 First Horizon National FHN $0.14 $0.16 Halliburton HAL $0.94 $0.92 Hasbro HAS $1.27 $1.30 McMoRan Exploration MMR ($0.05) ($0.16) Wells Fargo WFC $0.72 $0.72
* Report includes items that make comparisons to the consensus estimate questionable
Long positions in stocks mentioned: none
For more of Mr. Moenning’s thoughts and research, visit StateoftheMarkets.com
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