Tuesday Morning – August 18, 2009  

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Good morning. Stocks were hit with hefty losses for the first time in more than a month on Monday as the Dow dropped -186 points. In looking for reasons why our heroes in horns suddenly found themselves on the run, I guess we could blame in on Japan, or China, or the consumer, or the economy, or the fact that it was simply time for a pullback.

No, scratch that. We can’t really blame the 2% decline on the economy because the data released yesterday wasn’t half bad. However, with everyone focused on the idea that the economic upside may already be priced into stocks all around the globe, the fact that the manufacturing data in the New York region was significantly better than expected was simply cast aside.

Instead of the good news in New York, traders decided to focus on the land of the rising sun. The good news is Japan’s GDP moved into the plus column last quarter, which would usually be viewed as a positive. But unfortunately, the +0.9% gain in GDP was a tenth light from the 1.0% that had been expected.

Sticking with a far eastern bearish theme, China’s Shanghai Composite Index was also a major sore spot for the bulls on Monday as the -5.8% dive was biggest single-day percentage drop since November. The worry here is the government may begin to make investing in stocks more difficult in an attempt to deflate a potential bubble before it gets out of hand. The bears may have a point on this one as the Shanghai Composite is up something on the order of +65% year-to-date. Thus, a correction in China might actually make some sense.

So, with stocks around the globe suddenly in correction mode, the question of the day is if we should cut and run while we’ve still got some gains to protect or try and stick it out? To help answer the question, we’ll turn to history. And although history never repeats exactly, we can make some money when we can find a rhyme.

If you will recall, the NASDAQ recently went on a tear of twelve consecutive sessions without a red-letter day. And when my friend Curt Bergquist did some digging, he found that since 1971, there have been 18 such streaks of 11 straight up days or more. What is interesting is that once the streak ended there was usually a period of waffling and then a pullback such as we’re seeing now. Here’s the good news: The biggest correction after such a “streak” was -5.7% and 9 of the 18 corrections saw declines of less than -4%. (Oh, and did I mention that the current pullback is -4% on the nose?)

And as they say on T.V., “But wait, there’s more!” The really cool part of this analysis is that after the initial correction of -4% or so, in 18 out of the 18 occasions, the NASDAQ then rallied and recovered the ENTIRE drop. And then in 16 out of 18 instances, the NASDAQ actually went to new highs before anything nasty got started. So, if history is any kind of a guide here – and we will have to admit that we do like the odds when something has transpired 18 out of 18 times – once this pullback is over, we should see a rally that recovers the entire drop.

Turning to this morning, the Producer Price Index for July came in better than expected with a decline of -0.9% versus expectations for -0.2%. The so-called Core Rate was also better at -0.1% vs. +0.1%. However, Housing Starts came in a bit light at 581K vs. 598K.

Running through the rest of the pre-game indicators, the major overseas markets recovered a bit after yesterday’s dive. Crude futures are moving lower with the latest quote showing oil trading off by $0.08 to $66.67. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.496%, while the yield on the 3-month T-Bill is trading at 0.17%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a better open. Although the futures are off their highs, the Dow futures are currently ahead by about 47 points; the S&P’s are up about 5 points, while the NASDAQ looks to be about 11 points above fair value at the moment.

Remember to smile at least once before lunch and until next time, “may the bulls be with you!”