Are The Clouds Clearing?

Daily State of the Markets 
Wednesday Morning – September 15, 2010  

Publishing Note: I am traveling on Thursday and Friday (visiting colleges with my youngest) and will not publish a morning report unless conditions warrant. Normal Daily State of the Markets reports will return on Monday.

The uncertainty of the macroeconomic outlook both here in the U.S. and around the globe has been a cloud hanging over the market for the better part of four months now. However, the recent flow of data suggests that the summer swoon may have been overdone as the odds of the current soft patch in the economy turning into a double dip seem to be fading.

Except for the last 20 minutes of trading, which we will get to in a moment, the vast majority of Tuesday’s session seemed to support the idea that the dark clouds that have been hanging over the market may be starting to clear. We saw better-than-expected economic data, talk of Fed action, a fair amount of chatter about new and improved dividends from some market heavyweights, and some more talk about the need for the government to get out of the way.

For those interested in the details, traders were treated to a pleasant surprise yesterday before the open in the form of the report on July Retail Sales. Although it was just a little over a week ago that most everyone was expecting the consumer to crawl back into a cave, the Retail Sales numbers actually surprised to the upside with a gain of +0.4% or +0.6%, depending upon whether or not you want to include the sale of autos. But, despite the better-than-expected results, the market seemed unimpressed at the open and drifted lower on sagging bond yields.

With a market that had been up 8 out of 9 days and was now bumping its head on resistance, no one was terribly surprised to see the early action get sloppy. However, a report out of Goldman Sachs suggesting that the Fed was getting ready to launch the QE II (i.e. a second round of ‘quantitative easing’ – aka the direct purchase of Treasury bonds by the Fed) put the bulls back in business in a big hurry. In short, the thought that the Fed might be ready to lend a hand allowed traders to see the potential for blue skies ahead (or at the very least, gave them a reason to cover some shorts).

Now mix in both Cisco Systems (CSCO) and JPMorgan (JPM) talking about either starting to pay or going retro on their dividends and you’ve got the recipe for a test of overhead resistance. While no one really expected the bulls to be able to push through the wall of resistance at the top end of the trading range on their first try, it did feel like optimism was building around lunchtime.

However, as was largely expected, the fun didn’t last. At first blush, it appeared that those nasty HFT boys decided to play with their computer toys again into the close. The sell programs knocked the indices off of their high water marks and pushed the Dow and S&P back into the red as the closing bell rang.

But upon further review, we found that there was talk of a bomb/terrorist threat at the Eiffel Tower at about the same time the selling began. Although reports were few and far between, such a scare during an quad-witch expiration week was easily enough to knock 50-60 points off the Dow in a matter of minutes. And frankly, we can’t blame anyone for selling first and asking questions later on this type of rumor.

So, where does this leave us? Basically, in the same place we started the day – overbought, bumping into resistance, and data dependent. Thus, we’ll once again be watching the wires closely for today’s reports.

Turning to this morning… stocks futures are pointing lower at the moment as the Empire Manufacturing Index (designed to indicate the state of the manufacturing sector in the New York region) for September fell to 4.14, which was below the consensus expectations for a reading of 6.40. In addition, the government reported that Import Prices for the month of July rose by +0.6%, which was higher than the consensus for an increase of +0.3%.

Finally, happiness is a choice. What will you choose today?

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: +0.72%
  • Shanghai: -1.34%
  • Hong Kong: +0.14%
  • Japan: +2.34%
  • France: -0.70%
  • Germany: -0.44%
  • London: -0.29%

   

• Crude Oil Futures: – $1.20 to $75.60
• Gold: – $3.20 to $1268.50
• Dollar: lower against the Yen, higher vs. Euro and Pound
• 10-Year Bond Yield: Currently trading higher at 2.726%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -5.40
  • Dow Jones Industrial Average: -44
  • NASDAQ Composite: -11.84  

Wall Street Research Summary

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