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Daily State of the Markets One of the best books I’ve read about the stock market over the years was written by Norman Fosback in 1976, entitled “Stock Market Logic.” I’m not entirely sure if Fosback intended the title to be an oxymoron, but perhaps one of the greatest misconceptions about the stock market is that the game actually makes sense. For example, how many out there expected the stock market to be up on Monday after the Senate passed the Health Care bill on Sunday night? To hear the bears tell it, selling stocks after the passage of this historic bill made perfect sense. I even heard some refer to “selling the fact” on the bill’s passage as being a no-brainer. In short, with the market extended and overbought, the glass-is-half-empty gang expected traders to be appalled that the government was raising taxes on capital gains among other things. And while higher taxes are never good for businesses or the stock market, the bottom line is that selling a “known” is not how the game is played. Stocks did get knocked around a bit at the open. But while most of the focus was on health care, there were two issues that may have been better excuses for the quick dance to the downside. First, the IMF mentioned that it was worried about all the debt being floated these days and said that the advanced economies face “acute challenges” with their deficits. And second, the situation in Greece appears to be getting worse as opposed to better. But before you could figure out how to spell the Greek Prime Minister’s name, the real lesson of the day presented itself: Stocks sell off due to uncertainty – not when things that are “known” are confirmed. The fact that the health care bill passed was not a surprise. The contents of the health care bill (yes, including the taxes on capital gains) were not a surprise. And the fact that the Democrats were able to round up the votes they needed to pass the bill was, yep, you guessed it – not a surprise. Thus, the key point is that while it may not be entirely logical, the passing of the bill actually REMOVED uncertainty. Now that the bill has passed, analysts can put a pencil to who is going to pay what and when. This also will help remove uncertainty over time. There will be winners and losers due to this bill. And it is now our job as investors to figure out which companies will wind up on which side of the ledger. So, while Monday’s rally may not have been logical, my hope is that it now makes some sense. In looking at the charts, the bulls could be heard doing a little jawing of their own after the bell. With the S&P playing a game of tag with its 10-day moving average Monday, our heroes in horns were quick to suggest that yesterday morning’s weakness was the “retest” that everyone has been expecting. While the jury is definitely still out on that one and the bulls will almost certainly be challenged again, we will say that it’s “so far, so good” in terms of the testing of the breakout levels. Turning to this morning… we do not have any economic data to review before the bell. However, we will get reports on Existing Home Sales, the US House Price Index, and the Richmond Fed at 10:00 am. And other than the German public continuing to voice their opposition to assisting Greece (and suggesting that Greece be kicked out of the EU ) things are fairly quiet on the news front. Running through the rest of the pre-game indicators, Asian markets are mixed while European bourses are higher. Crude futures are down $0.28 to $81.32. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.66%. Next, gold is moving down $1.50 to $1098.00 and the dollar is higher against the Yen, 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 rather flat open. The Dow futures are currently ahead by about 2 points; the S&P’s are within a point of fair value, while the NASDAQ looks to be about a point above fair value at the moment. Wall Street Research Summary Upgrades: |
Scotts Miraclo-Gro (SMG) – BofA/Merrill China Telecom (CHA) – BofA/Merrill Convergys (CVG) – Mentioned positively at Citi Automatic Data (ADP) – Cowen & co Paychex (PAYX) – Cowen & co American Semiconductor (AMSC) – Jefferies UAL Corp (UAUA) – Target increased at JPMorgan Alaska Airlines (ALK) – Target increased at JPMorgan Delta Airlines (DAL) – Target increased at JPMorgan Alliant Techsystems (ATK) – JPMorgan Saks (SKS) – JPMorgan Baidu (BIDU) – Kaufman Bros National Fuel Gas (NFG) – Target increased at Wells Fargo
Tele Norte Leste (TNE) – Barclays AMR Corp (AMR) – Estimates reduced at Citi, Target reduced at JPMorgan Laboratory Corp (LH) – Deutsche Bank PetSmart (PETM) – Janney Capital Continental Airlines (CAL) – Target reduceded at JPMorgan Strayer Education (STRA) – RBC Capital Essex Property (ESS) – UBS Realty Income (O) – UBS Public Storage (PSA) – UBS Tenaris (TS) – UBS Caterpillar (CAT) – Estimates reduced at Wells Fargo
Long positions in stocks mentioned: NFG
Remember to think positive and
David D. Moenning
Founder TopStockPortfolios.com
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