Is There a “Yea, But?”

Daily State of the Markets 
Monday Morning – February 1, 2010  

Good morning. Since Friday afternoon, the bear camp has been telling anyone that will listen that Friday’s tape action was simply horrid and represented a classic case of the market not advancing on good news. To hear our furry friends tell it, this is not a harbinger of good things to come. The glass-is-half-empty crowd is also quick to point to the increase in volume on the DJIA chart and the fact that the indices closed on their lows as additional evidence that stocks are likely headed lower in the intermediate-term.

Although there may be a “yea, but” that can be applied to Friday’s action, we will have to agree that the bears might have a point here. To review, we got word that the economy grew at a pace that was significantly above the consensus expectations (5.7% vs. 4.7%), we learned that 78% of the companies in the S&P 500 have reported earnings that were above the estimates, we heard that the Chicago Purchasing Managers Index came in better than expected, and finally, the University of Michigan informed us that their Confidence index was much better than consensus. So, all in all, this was a pretty good batch of news.

Unfortunately though, the stock market’s response to this plethora of upbeat data was to drop another 53 Dow points and close at a new low for this move. In addition, volume increased on the Dow and breadth was anything but positive.

Analysts suggested that part of the reason for the market thumbing its nose at the upbeat economic news is that the pace of GDP growth is likely unsustainable. If you dig into the report, you will find that much of the economic growth during the fourth quarter was attributable to inventory rebuilding. While the bulls will argue that growth is growth regardless of its origin, those on the opposite side of the aisle point to the fact that rebuilding inventories is usually a temporary positive.

Getting to the question of the “yea, but” posed in the title of this morning’s missive, the bulls will point out that the flush into the close on Friday afternoon may not be have been as bad as it appeared. Our heroes in horns argue that traders may have been concerned about the potential for “event risk” over the weekend. So, instead of covering shorts into the end of a profitable week for the bear camp, traders may have been adding to short bets as a way to hedge against bad news coming out of places like Greece.

Given that the market is now very oversold and that there weren’t any sovereign debt bombshells out of Greece (or any of the other PIGI’S), one might expect to see the market bounce this morning. And as we’ve been saying, the veracity of said bounce will likely provide a clue as to whether or not the current dance to the downside is ending or just getting started.

Turning to this morning, the start of the new month brings a host of economic data. To kick things off we’ve got the report on Personal Income and Spending.

Personal Incomes grew by +0.4% in December, which was a tenth above the consensus expectations for an increase of +0.3%. (November’s reading was revised higher to +0.5% from +0.4%.) Personal Spending came in a little light at +0.2% vs. expectations for +0.3%. (November’s reading for spending was also revised higher to +0.7% from +0.5%.) On the Inflation front, the PCE Deflator sports an increase of 2.2% over the past year, which, was higher than the November reading of 1.5%. Finally, the PCE Core increased just 0.1% in December, above economists’ expectations for an unchanged reading.

Running through the rest of the pre-game indicators, the overseas markets are mixed but improving across the pond as the day wears on. Crude futures are up $0.60 to $73.41. On the interest rate front, we’ve got the yield on the 10-yr trading higher at 3.62%. Next, gold is moving up by $4.90 and the dollar is lower against the Yen and Euro but higher against the Pound. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a better open. The Dow futures are currently ahead by about 52 points; the S&P’s are up about 5 points, while the NASDAQ looks to be about 8 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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