Access Denied (Again)

Daily State of the Markets 
Tuesday Morning – October 26, 2010  

Stocks rallied out of the gate again Monday morning for the usual reasons – good earnings, good data, a falling dollar, and oh, I almost forgot, the fact that Ben Bernanke is about to open up the Fed’s checkbook again. All of the above combined to propel the Dow to what appeared to be new heights for this bull market. But unfortunately, by the time the closing bell rang, access to the Promised Land had once again been denied.

For the second time in three days, the venerable Dow Jones Industrial Average ran right past the previous bull market high set on April 26th at 11,205.03. Within minutes (30 to be exact) the Dow was sitting pretty and looking down on its old high. However, as was also the case for the second time in three days, the fun didn’t last long and everybody’s favorite stock market index finished with a paltry gain of 31 points.

Don’t get me wrong, a gain of 31 points is nothing to sneeze at. After all, with +0.3% here and +0.3% there, before too long you’re talking about some real money. No, the issue of the day was the fact that everyone knew the Dow was sitting at a lofty level in the early going and it appears that everyone got cold feet (or in this instance, a case of acrophobia) at the same time.

While we could certainly blame the boys and their HFT computer toys for the late-day dive as stocks did tank from the lofty 11,220 level to 11,165 in the last half hour, the Dow’s inability to “get ‘er done” seems to be more a case of a trade that might be getting just a teensy bit crowded.

Quickly now, see if you can rattle off the reasons for the Dow’s relatively swift ascent that began on September 1st. If you mentioned the Fed, QE II, a falling dollar, and the hope for an improving economy, give yourself a gold star. With the Fed committed to reflating the economy and maybe creating a little inflation along the way, traders have been busy adding risk to their holdings on the bet that Helicopter Ben will succeed in his quest for blue skies ahead.

However, the recent price action suggests that “the trade” is not only crowded, but perhaps a little extended as well. The problem with betting on hope is that at some point, the potential good news gets priced in. And given that the bulls have been quickly shown the door recently, we’re beginning to wonder if that point has arrived.

I know, I know, everybody’s talking about S&P 1250 as an upside target (this could have something to do with the projections from the recent head-and-shoulders bottom formation that was confirmed in mid-September). But we should keep in mind that the battle cry for those running big hedge funds is to “sell when you can, not when you have to.” As such, anyone looking for an opportunity to book some profits may be using the Dow’s high water mark as a spot to do so.

Turning to this morning… Stock futures are pointing to a lower open on Wall Street as foreign markets are lower across the board and traders build on yesterday’s weak close.

On the economic front… We don’t have any data to review at this time, but we will get the Case-Shiller report on housing at 9:00.

Finally, just for tun, try smiling at everyone you meet today…

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: -0.40%
  • Shanghai: -0.32%
  • Hong Kong: -0.11%
  • Japan: -0.25%
  • France: -0.75%
  • Germany: -0.32%
  • London: -0.84%

   

• Crude Oil Futures: – $0.52 to $82.00
• Gold: – $8.20 to $1330.70
• Dollar: higher against the Yen and Pound, lower vs. Euro
• 10-Year Bond Yield: Currently trading at 2.608%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -4.40
  • Dow Jones Industrial Average: -37
  • NASDAQ Composite: -10.15  

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

Wall Street Research Summary

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