Daily State of the Markets 
Friday Morning – December 17, 2010  

It appears the bears blew another opportunity to get something going to the downside on Thursday. They had Wednesday’s chart weakness, a lousy bond auction in Spain, and a surprisingly bad earnings report out of FedEx. But as can happen at this time of year, the bulls managed to turn the attention to the better-than-expected data (among other things), and by the end of the day anyone owning stocks was able to head out to the mall with a smile.

To be sure, the driver of the action lately has been the data here at home. Almost without exception, the U.S. economic reports have come in above expectations. So, given the idea that the economy is improving, traders are able to avert their attention from the misery that is the European debt mess and get into the holiday spirit.

From where we sit, the data, as well as the market’s reaction to the numbers, would seem to be telling us a few things. First, it is now quite clear that the “soft patch” that we were all so worried about in late summer never gained any traction (thanks Ben!). Next, the economy appears to be gaining some momentum and may actually surprise to the upside in 2011 (GDP estimates are being increased with regularity lately). Thirdly, we see that consumers are out there shopping with abandon again. And last, but definitely not least, the improving data and the corresponding rally in stock prices tells us that the stock market is beginning to raise the bar in terms of expectations going forward.

It is this final point that you may want to spend some time pondering while waiting in line at the store. Remember, the stock market is a discounting mechanism and as such, it looks (to me, anyway) that the market is looking ahead to brighter days. Thus, as long as the data continues to come in above expectations, then the bulls should be able to enjoy a good start to 2011.

While I could certainly be putting the cart well before the horse here, we must also remember that Wall Street tends to overdo EVERYTHING in both directions. If you look back at the trends we’ve seen in the market over the past year, it becomes clear that traders like to go hard in one direction and then – bam! – go the other way. In short, with the exception of the consolidation seen in July and August, most of the trends have been one-way affairs, with little, if any, countertrend action.

My point, you ask? Although stocks certainly have some room to run as traders discount better days ahead for the economy, we should be on the lookout for things becoming overdone. And while I am indeed a card-carrying member of the glass-is-half-full club, I’ll be watching how the market reacts when we eventually get some data that doesn’t quite fit in with the joyous holiday spirit.

Turning to this morning… Despite better-than-expected earnings from Oracle (ORCL) and RIMM, it looks like we’ve got some quadruple-witch expiration shenanigans to deal with in the early going. And the fact that Moody’s has downgraded Ireland definitely isn’t helping matter much as it appear the bears may try to hold the line at the open. We’ll also be watching the bond market today as yields are down hard in the early going.

On the economic front… Germany’s IFO Business Climate Index rose for the seventh straight month. Here at home we’ll ge the Index of Leading Indicators at 10:00 am eastern.

Thought for the day: Best of luck to you on this Friday and be sure to enjoy the last holiday shopping weekend!

Pre-Game Indicators

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

  • Major Foreign Markets:
    • Australia: -0.32%
    • Shanghai: -0.15%
    • Hong Kong: +0.20%
    • Japan: -0.07%
    • France: -0.22%
    • Germany: -0.40%
    • London: -0.13%

     

  • Crude Oil Futures: – $0.23 to $87.47
  • Gold: + $0.40 to $1371.40
  • Dollar: higher against the Yen, Euro and Pound
  • 10-Year Bond Yield: Currently trading lower at 3.384%

     

  • Stocks Futures Ahead of Open in U.S. (relative to fair value): 
    • S&P 500: -0.02
    • Dow Jones Industrial Average: -6
    • NASDAQ Composite: +1

Wall Street Research Summary

Upgrades:

Applied Materials (AMAT) – Barclays MKS Instruments (MKSI) – Barclays QLogic (QLGC) – Initiated Buy at Citi Sonic (SONC) – Cowen Oracle (ORCL) – Target and estimates increased at Credit Suisse, Upgraded at Oppenheimer Visa (V) – Added to short-term buy at Deutsche Bank Blue Nile (NILE) – Estimates incresed at Goldman Sachs Accenture (ACN) – Jefferies Global Payment (GPN) – Morgan Stanley Halliburton (HAL) – Target increased at Oppenheimer Weatherford International (WFT) – Target increased at Oppenheimer Southwest Air (LUV) – Soleil Securities

Downgrades:

Cymer (CYMI) – Barclays Ball Corp (BLL) – Credit Suisse Nasdaq OMX Group (MDAQ) – FBR Capital Visa (V) – Removed from Conviction Buy at Goldman Sachs CME Group (CME) – Keefe, Bruyette & Woods Investment Technology Group (ITG) – Keefe, Bruyette & Woods TradeStation (TRAD) – Keefe, Bruyette & Woods CH Robinson (CHRW) – RW Baird Comerica (CMA) – RW Baird

Long positions in stocks mentioned: QLGC

 

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