A Disconcerting Pause?

Daily State of the Markets 
Thursday Morning – February 11, 2010  

Good morning. With a deal to help Greece (and the rest of the PIGI’S for that matter) apparently in the works, one might have expected stocks to continue their celebratory bounce on Wednesday. However, Ben Bernanke’s headline about the Fed raising the Discount Rate “before long” seemed to provide a reality check for traders from a macro perspective.

Stocks have spent much of the last 10 months discounting better days ahead. The market first rallied in response to the funeral for the banking system having been cancelled. Stocks then continued to rise on the hope that the recession would end sooner rather than later. And finally, investors did more buying in anticipation of a recovery in both the economy and corporate earnings.

The process of discounting blue skies ahead moved the major indices up in a relatively straight line with nary an interruption along the way. However, the 10 month rally wound up being one of the strongest moves over the shortest period of times in history. Thus, one could argue that the run for the roses left the market vulnerable to a reality check.

So, while the bulls certainly have the right to have pushed the pause the pause button yesterday in order to sort out the data inputs, we found it strange that the market didn’t continue to romp higher on the back of an almost certain European accord to end the deficit crisis in Greece. Although our heroes in horns could certainly hit “play” this morning now that a deal is said to have been reached, traders usually like to continue to “buy the rumor” all the way up until the actual news is released. So, while we hate to be spoilsports and we reserve the right to be reading too much into this, our position is that yesterday’s pause was disconcerting from the bulls’ standpoint.

Traders couldn’t be blamed for being taken aback by the headline from Ben Bernanke’s written testimony yesterday. Stocks took a dive when word got out that Bernanke had talked about “raising the Discount Rate before long.” At first, this appeared to be a big change in the Fed’s stance. But upon further review, the headline appeared to have been taken out of context as the rest of the testimony reiterated the Fed’s stance of keeping rates low for an extended period of time.

While the quick decline of 100 points and the subsequent rebound was not terribly surprising, the fact that the bulls couldn’t hold serve was. Thus, we will need to closely monitor how the market reacts today because a market that can’t go up on good news is usually in trouble.

Turning to this morning, the EU has announced that an accord to assist Greece with the deficit woes has been reached and that the details will be released later today.

On the economic front, if it’s Thursday, then we’ve got the report on weekly jobless claims to review. The Labor Department reported that initial claims for unemployment insurance for the week ending February 6th fell by 43,000 to 440K, which was below the expectations for a reading of 465K. Last week’s revised total was 483K (from 480K). Continuing Claims for unemployment for the week ending January 30th were also below consensus at 4.538M vs. expectations for 4.59M and last week’s revised total of 4.617M.

Running through the rest of the pre-game indicators, the overseas markets are mixed with Asia higher and Europe sporting returns on both sides of breakeven. Crude futures are up $0.41 to $74.94. On the interest rate front, we’ve got the yield on the 10-yr trading higher at 3.72%. Next, gold is moving up by $2.60 and the dollar is higher against the Euro and the Yen but lower against the Pound. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a modestly higher open. The Dow futures are currently ahead by about 25 points; the S&P’s are up about 2 points, while the NASDAQ looks to be about 6 points above fair value at the moment.

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

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