A Change of Tune?

Daily State of the Markets 
Wednesday Morning – October 20, 2010  

In case you haven’t noticed, I find that there is usually a well worn Wall Street cliché available to fit just about every situation. But the trouble this morning is I’m having difficulty deciding which saying is more appropriate. On the one hand, the old saw “one day does not a trend make” would seem to fit the market’s first crummy day in two months. But on the other hand, one of my all-time favorite Wall Streetisms reminds me that on the street of dreams, “Once is a trend, twice is a tradition, and three times is a commandment!”

So, should we assume that the market has changed its tune and is now going to head lower for a while? Or is it better to stay with the prevailing trend that, up until yesterday, had produced an intraday advance of nearly +14% in under two months? While predicting the future isn’t my strong suit, we’re of the mind that we don’t have enough evidence to make a decision at this point in time. And although this may sound like a copout, did you really expect me to expose my noggin to Ms. Market’s baseball bat with a prediction?

However, I can say that we may be seeing the beginning of what could wind up being a character change for the stock market. You see, up until the moment that IBM and Apple reported earnings, all news was good news. Remember, with the Fed about to start buying up bonds again, we had a head-stocks-win, tails-stocks-win-too environment. It didn’t matter whether economic data was good or bad, it was good for stocks. And earnings, while they are always nice, weren’t necessarily a prerequisite for a rally because all eyes were fixed squarely on Mr. Bernanke’s band of bond buyers.

But that attitude of gratitude seemed to change after Big Blue and the King of Cool let their numbers fly Monday night. While both tech bellwethers reported strong numbers on just about every front, traders found something to get uptight about and took the stocks lower post haste. Thus, I will submit that the action in these two companies suggests that those engaged in the “buy the rumor, sell the news” trade of the day might be getting an itchy trigger finger.

So, when China surprised everyone by raising interest rates for the first time in nearly three years, it wasn’t shocking to see the glass-is-overflowing gang head for the exits – and in a hurry yesterday morning. Thus, in the early going at least, it looked like the bears had taken possession of the ball and were looking to score.

But up until the time Bloomberg reran a headline regarding Bank of America being asked to buy back a cool $47 billion in mortgages, the bulls were hanging tough. And right up until the time everyone started digging into the BAC story, it looked like it was anybody’s ball game. But, as one might suspect, allegations of misdoings in the mortgage service business and the anticipated penalties put the kibosh on any upside inklings the bulls might have had.

Although I can’t make a prediction about the near-term direction of the market, I can say that if this thing with Bank of America gains traction with the media and investors alike, our furry friends just might start singing a happy tune.

Turning to this morning… Stocks are attempting to rebound a bit after yesterday’s selling. Surprisingly, the declines in Asia were modest and European bourses are actually higher at the moment.

On the economic front… We don’t have any economic data to review before the bell but we will get the Beige Book at 2:00 pm eastern and then China’s Industrial Production, CPI, PPI, and Retail Sales this evening at 10:00 pm.

Finally, consider embracing an “attitude of gratitude” during the day today…

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: -0.69%
  • Shanghai: +0.07%
  • Hong Kong: -0.87%
  • Japan: -1.65%
  • France: +0.46%
  • Germany: +0.29%
  • London: +0.16%

   

• Crude Oil Futures: + $0.73 to $80.22
• Gold: + $5.50 to $1341.50
• Dollar: higher against the Yen, lower vs. Euro and Pound
• 10-Year Bond Yield: Currently trading at 2.491%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +4.90
  • Dow Jones Industrial Average: +39
  • NASDAQ Composite: +9.27  

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

Wall Street Research Summary

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