Buying The Rumor?

Daily State of the Markets 
Thursday Morning – July 8, 2010  

The talk about town these days seems to be centered on the idea that the results from the bank stress tests in Europe (scheduled for release on July 23rd) are going to come in largely better than expected. This was at least part of the reason behind Wednesday’s joyride to the upside of 275 points as traders appear to be “buying the rumor” on the European banking front.

In case this concept is new, traders often buy on the “rumor” of a specific outcome in front of a big event and then “sell the news” when the event actually comes to pass. And while we have very little in the way of concrete evidence to substantiate this theory, the thinking on the street these days seems to be that the results of the European bank stress tests will show the banking system across the pond to be much stronger than has been feared over the past two months.

So, while we’re not entirely sure why it took until Wednesday to happen, traders finally decided to push aside their worries and focused on the bright side for a change. Or, at the very least, some of the shorts that may have been late to the bitter barn decided to run for cover. Thus, it will be up to the bulls to produce a follow-through day in the next few sessions if they want to keep the party going.

While an oversold bounce was certainly to be expected after the thrashing the market has endured since April 23rd, it was the trigger for such a move that had been missing. And while there wasn’t any obvious catalyst to convince the shorts to cover, the combination of several minor news items appears to have been enough to do the trick.

For starters, Greece’s Finance Minister said that things were going according to plan, that his country hoped to return to the bond market in 2011, and they he saw no need for the dreaded restructuring of debt that everyone has been fretting over. Next up, State Street (STT) provided an oasis of good news by upping its 2010 earnings outlook to $0.87 from $0.73. Then the report that credit card delinquencies had fallen to an eight-month low was seen as a sign that the consumer was getting their financial houses in order. In addition, Dallas Fed President Richard Fisher, who has switched to using football analogies now, ruled out the possibility of the economy heading back into recession. And finally, the DJIA pushed back above the media’s favorite line in the sand – Dow 10,000.

So, where do we go from here? The good news is technicians tell us that the move back above 1040 on the S&P 500 suggests that there is now some support to lean against from the long side. And if our recollection of oversold bounces is correct, we ought to see some additional upside before the bears return to the game. Thus, it will be important to see if the bulls have anything left after yesterday’s blast off the bottom.

Turning to this morning… We’ve got the same-store sales numbers from the nation’s retailers flowing in. The numbers are a mixed bag so far with Abercrombie (ANF), Aeropostale (ARO), Zumiez (ZUMZ), JC Penney (JCP), and Nordstrom (JWN) coming in ahead of expectations while the numbers from American Eagle (AEO), Costco (COST), TJX (TJX), Kohl’s (KSS), and Target (TGT) were a bit below consensus.

On the economic front, the Labor Department reported that initial claims for unemployment insurance for the week ending July 3rd fell by 21,000 to 454K. The week’s total was below the Reuters consensus for a reading of 462K. Continuing Claims for unemployment for the week ending June 26th were also below consensus at 4.413M vs. expectations for 4.60. Stock futures have moved higher on the report.

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

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: +2.25%
  • Shanghai: -0.25%
  • Hong Kong: +0.97%
  • Japan: +2.76%
  • France: +1.55%
  • Germany: +0.49%
  • London: +1.57%

   

• Crude Oil Futures: + $0.55 to $74.62
• Gold: – 0.80 to $1198.10
• Dollar: lower against Yen and Euro, higher vs. Pound
• 10-Year Bond Yield: Currently trading higher at 3.03%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +6.90
  • Dow Jones Industrial Average: +52
  • NASDAQ Composite: +12.8  

Wall Street Research Summary

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