Plenty of Reasons

Daily State of the Markets 
Thursday Morning – March 25, 2010  

Stocks struggled on Wednesday as there were plenty of reasons for traders to put any additional end-of-quarter buying plans on hold. But, while Dow finished in the red for only the second time in the last twelve sessions, the bottom line is the pullback didn’t really do much damage from either a psychological or chart standpoint.

When stocks get on a roll like the one we’ve seen since February 9th, the move tends to defy logic. And while it is clear that money is being put to work, what isn’t so obvious is the reason why.

Sure, we can argue that money managers with cash on hand may be worried about missing out. Yes, it is also true that the economy appears to be on the mend. And we will even buy into the idea that traders are “buying the rumor” ahead of next week’s jobs report, which is expected to be strong. But after the S&P has run 11.1% in six weeks, it might be getting hard for traders to justify buying a lot more.

Thus, we will offer up the idea that the primary reason behind Wednesday’s selling (as well any further pullback we might see in the near term) is that buyers recognize that it might be time to stand aside for a while. Let’s face it; stocks are overbought, the sentiment has become too optimistic, valuations are becoming stretched, and the memory of what happens to markets when things get out of hand is likely still fresh on the minds of most traders. So, when CNBC starts doing stunts with animals to determine the next stop for the DJIA, it is probably time for the bulls to take a little break.

What the bears have been missing over the past several weeks is a trigger or a catalyst to get the selling party started. And while none of the stories on Wednesday would fit into the earth shattering category, there did seem to be enough to cause the sellers to participate for a change.

For starters, there was Fitch’s downgrade of Portugal’s sovereign debt rating. Since Fitch’s rating of AA was basically in the middle of S&P and Moody’s before the downgrade, the action wasn’t terribly surprising. However it did serve to remind investors that the problems related to having too much debt haven’t gone away.

Next up was the report on New Home Sales. No one on the planet was surprised to see this number come in on the punk side. But the fact that the annualized rate of sales hit an all-time low, did attract some attention.

Finally, there was the government’s 5-year note auction, which wasn’t well received. For the second day in a row, the demand for the offering was only modest. This sparked concern about the rates the U.S. will have to pay this year in order to finance the trillions slated in debt to be raised. And while the U.S. isn’t Greece, higher interest rates are not welcome at this time.

Turning to this morning… Word that German Chancellor Merkel said she will support a combination of IMF and EU aid to Greece as a measure of last resort is lifting Europrean markets and futures in the u.S.

On the economic front, the Labor Department reported that initial claims for unemployment insurance for the week ending March 20th fell by 14,000 to 442K, which was below the expectations for a reading of 450K and last week’s revised total of 456K. Continuing Claims for unemployment for the week ending March 13th were above consensus at 4.648M vs. expectations for 4.562M but below last week’s revised total was 4. 702M.

Running through the rest of the pre-game indicators, Asian markets are lowerwhile European bourses are now higher on the Greece news. Crude futures are up $0.36 to $80.97. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.85%. Next, gold is moving up $4.70 to $1093.50 and the dollar is higher against the Yedn but lower against the EUro and Pound. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a higher open. The Dow futures are currently ahead by about 45 points; the S&P’s are up about 6 points, while the NASDAQ looks to be about 10 points above fair value at the moment.

* Report includes items that make comparisons to the consensus estimate questionable

Wall Street Research Summary

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