Opportunity Lost?

Daily State of the Markets 
Tuesday Morning – November 23, 2010  

What could have and perhaps should have been a quiet Monday of a holiday week turned out to be anything but as the bears smelled blood in the early going yesterday. With traders continuing to fret over the possibility that spiking bond yields could wreak havoc on a growing number of nations and the television screens sporting shots of FBI raids on hedge funds offices in New York, it looked like the Bears were going to get something going.

What made this bearish opportunity more important were the facts that (a) pre-market trading had been to the upside in response to the Sunday announcement that Ireland had finally agreed to get some help in backstopping its state-run banks and (b) this was supposed to be a quiet week. But instead of the usual modest move higher on light trading into the Thanksgiving Holiday, traders decided to sell first and ask questions later in the early going.

Right around the time the lunch bell rang, it looked like the bears had an opportunity to break the game wide open. The images of FBI raids and the worry over what actually qualifies as insider trading these days had all but erased last week’s late rally effort and the S&P 500 was flirting with a break of important chart support.

The financial sector led the move lower on a number of negative, yet not completely new, headlines. There was the Barron’s article reminding investors about the potential for mortgage “put backs,” which could be potentially devastating to bank bottom lines. There was the Barclay’s report revisiting the capital requirements of Basel III, which opined that U.S. banks would need to raise at least $100 – $150 billion in new capital. There was the ongoing concern about the Irish banks eventually needing to restructure debts held here in the U.S.. And finally, there was the excitement over the FBI leading people away in handcuffs.

However, just about the time the bulls could be hear mumbling something on the order of “Thanks? Thanks for nothing!” the rebound started. If you had been able to keep your emotions in check yesterday, you likely noticed that while the Dow and S&P appeared to be sinking into the abyss, the NASDAQ, Midcap, and Russell were not participating in the pity party.

In fact, these three indices appeared to be playing the role of rebel and were actually green for most of the day on the back of some M&A activity and strength in the semis. Apparently, this definitely got some people’s attention (including yours truly) and before you could figure out where your stop-losses should be for the day, the bulls were on the comeback trail and the bears had lost a pretty darn good opportunity.

Does the fact that the NASDAQ, Russell, and Midcap indices all finished with healthy gains on a “down day” mean that we should simply ignore the bear camp’s arguments going into the end of the year? Does the fact that the Midcap 400 is within a stone’s throw of its recent high mean that it is up-up-and-away from here? Will the missed opportunity put the market back on its traditional pre-Thanksgiving path?

As always, we don’t like to play the guessing game or make predictions. However, I will say that the current leadership is no longer in the blue chip issues and that if the bulls can get their party restarted, I’d be looking at the NASDAQ, the Russell, and the Middies as the place to play.

Turning to this morning… North Korea’s military response South’s efforts to get its neighbors to put a stop to the North’s nuclear ambitions has put the bears back in the game in the early going. And in keeping with our theme, it appears that we have all lost the opportunity to enjoy a quiet holiday week!

On the economic front… The government’s first revision of the nation’s third quarter GDP shows the economy grew at an annualized rate of 2.5% in the quarter. This is above the consensus expectations for a growth rate of 2.4%. (Recall that the final Q2 rate was +2.0%). Looking at the all-important consumer activity, the Personal Consumption component of the report came above expectations with a gain of 2.8% vs. 2.5%. And on the inflation front, the Deflator came in at 2.2% vs. 2.3%

Finally, make every effort to enjoy your day…

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: -1.16%
  • Shanghai: -1.94%
  • Hong Kong: -2.67%
  • Japan: Closed
  • France: -1.54%
  • Germany: -0.85%
  • London: -1.09%

   

• Crude Oil Futures: – $1.24 to $81.88
• Gold: + $1.40 to $1359.20
• Dollar: higher against the Yen, lower vs. Euro and Pound
• 10-Year Bond Yield: Currently trading lower at 2.749%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -11.59
  • Dow Jones Industrial Average: -90
  • NASDAQ Composite: -16.40  

Wall Street Research Summary

Upgrades: