A Costume Change?

Daily State of the Markets 
Thursday Morning – May 6, 2010  

The key question investors are faced with at the present time is if there has been a costume change in terms of the market leadership. For most of the last three months, our heroes in horns have been large and in charge while our furry friends in the bear camp have been unable to do much of anything right. However, given the action of the last week, one has to wonder if the bulls haven’t lost their touch.

Until just recently, the theme that had held investor’s attention was the clear-cut improvement in the U.S. economy. Report after report came in better than expected and even the jobs data started to make the turn. During this time, earnings reports were celebrated and little issues such as Greece, financial regulatory reform, and China’s efforts to put the clamps on what is looking like a real estate bubble were largely ignored. Instead of worrying about potential problems, dip buying was the focus as traders didn’t let declines of any size or duration go for long.

However, the volatility seen over the last couple of weeks leads us to wonder if the character of the market hasn’t changed. Instead of buying the dips, traders are now selling bad news and appear to want to position themselves defensively in front of any potentially negative events.

Wednesday’s action provided an example of this concept. After the opening dive, which was sponsored by Moody’s suggesting that Portugal is next in line for debt downgrades, the bulls looked like they wanted to make a stand. And based on the idea that the ECB might have something positive to say about the need for expediency in approving the Greek bailout, the buyers were able to erase the entire decline and even pushed the DJIA into the green for a spell.

Frankly, we had beeen looking for just such a bounce as this week’s dance to the downside had created an oversold condition. And while we weren’t sure if the bulls could make the move stick, a rebound of sorts wasn’t much of a surprise. We assumed the real test of the bulls’ conviction would come when our heroes in horns bumped into the old support zone – which, according to the technical analysis textbooks, is now new resistance. We figured if the glass-is-half-full gang could push back above Dow 11,000 in short order, then the recent decline would likely be viewed as just a blip and that the bulls would be back in charge. But, if the bears were to put up a fight and hold the line, well, that meaningful correction we’ve been concerned about might become a reality.

But unfortunately, the green screens didn’t last long and stocks finished to the downside once again. The good news is the 50-day moving averages held up during the selling. The bad news is that the question of who’s in charge wasn’t answered. So, we’ll need to watch the action closely over the next couple of days for clues as to which team has control of the ball.

Turning to this morning… The government reported Nonfarm Productivity in the first quarter increased by +3.6%, which was above the consensus for +2.6% and Q4’s revised increase of +6.6%. On the inflation front, Unit Labor Costs were reported to have fallen -1.6% versus the Q4’s revised reading of -5.6% and Q3’s drop of -4.4

Next up, the Labor Department reported that initial claims for unemployment insurance for the week ending May 1 fell by 7,000 to 444K, which was above the expectations for a reading of 440K. Continuing Claims for unemployment for the week ending April 24 were a bit below consensus at 4.594M vs. expectations for 4.61M.

Running through the rest of the pre-game indicators, the overseas markets are mixed by region with Asia down hard and Europe slightly higher. Crude futures are down $0.56 to $79.41. On the interest rate front, we’ve got the yield on the 10-yr trading higher at 3.57%. Next, gold is moving up by $3.90 to $1178.90 and the dollar is higher against the Yen, Euro and the Pound. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a mixed-to-slightly-lower open. The Dow futures are currently off about 5 points; the S&P’s are about even with fair value points, while the NASDAQ looks to be about 4 points below fair value at the moment.

Finally, don’t let success go to your head or defeat into your heart…

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

Wall Street Research Summary

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