Has Goldilocks Returned?

Daily State of the Markets 
Monday Morning – October 11, 2010  

In reviewing both the data and the market action from Friday, the question running through my mind is this: Do the reports even matter right now? In short, according to most analysts’ assessments, it appears that the jobs report came in on the punk side as Nonfarm payrolls fell 95K (vs. expectations for -7K) while private sector jobs grew by the slowest amount in three months. However, it also appears that traders quickly plunked the report in the “Goldilocks” category; I.E. not too hot and not too cold.

In my nearly 30 years of playing Ms. Market’s game, I’ve definitely seen periods of time when bad news is good news for the stock market and vice versa. But rarely has there been an environment where both good and bad news is good for stocks (well, okay, as long as the good news isn’t TOO good, that is). So, while I don’t have to like it, it appears that Goldilocks has returned to the corner of Broad and Wall.

In case you are scratching your head right about now, I’m referring to the idea that good economic news means that traders can bid stocks higher on the idea that things will improve in the future and that a double-dip is indeed off the table. And then when bad economic news is released, traders can also “buy ’em” based on the concept that the Fed is about to launch the QE II. And just to make sure we’re all on the same page with our terminology these days, QE II stands for a second round of FOMC “quantitative easing” – where the Fed buys up bonds in an effort to drive down longer-term rates (generally believed to be in the 2-5 year area of the yield curve) in order to stimulate the economy.

In all seriousness, it can be argued that Friday’s weak jobs report may represent the final straw in the FOMC’s decision to start buying bonds again on November 3rd. Listening to the Fedspeak over the past few weeks, it has become clear that members of Bernanke & Co. are not happy with the current level of unemployment (and if I’m not mistaken, full employment is one of the Fed’s mandates). Now toss in the Fed’s latest verbiage about inflation being too low and you’ve got a pretty clear message that the FOMC is about to get busy again.

Assuming the FOMC does launch QE II next month, the question of the day is if it will succeed. Thus, don’t be surprised if we see the “buy the rumor, sell the news” trade begin to get closed if stocks head much higher from here.

On the topic of how much farther the market can go, don’t look now fans, but the DJIA is a mere 199 points from its April high. And if you think back, this was a time in which everyone thought the economy was going to actually grow faster than analysts were projecting. Interesting, eh?

Oh, and in case you live in a cave, the venerable Dow Jones Industrials did manage to finish above the 11,000 mark on Friday. Why this matters to the media is beyond me as technicians will suggest that the 11,000 area is a fairly stiff resistance zone. So, if you want to throw a party, we’d suggest waiting until the Dow can surpass 11,200.

Turning to this morning… Things are fairly quiet in the pre-market with banks closed for the Columbus Day holiday today and no economic news to review before the bell. However, with foreign markets mostly higher, futures in the U.S. are pointing slightly higher at this point.

Finally, don’t forget the first rule of life, medicine, and money management: Do no harm…

Pre-Game Indicators

Here are the important indicators we review each morning before the opening bell…

• Major Foreign Markets:
  • Australia: +0.46%
  • Shanghai: +2.49%
  • Hong Kong: +1.15%
  • Japan: closed
  • France: +0.16%
  • Germany: +0.25%
  • London: +0.32%

   

• Crude Oil Futures: – $0.14 to $82.52
• Gold: – $1.80 to $1343.50
• Dollar: lower against the Yen, higher vs Euro and Pound
• 10-Year Bond Yield: Currently trading at 2.40%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +1.70
  • Dow Jones Industrial Average: +16
  • NASDAQ Composite: +0.70  

Wall Street Research Summary

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