Cause and Effect

Daily State of the Markets 
Friday Morning – February 12, 2010  

Good morning. One of my biggest pet peeves in this business is when the popular press oversimplifies the action in the market or gets it flat-out wrong. For example, after the close yesterday, one very big news outlet ran the headline “EU’s Backing of Greece Boosts Wall Street.” While it is true that the EU did pledge to back Greece in very broad and non-specific terms, this news was available well before the market opened and stocks actually opened lower due to a lack of details in the plan.

Another headline cited the better-than-expected report on weekly jobless claims as the reason for the triple-digit gain in the Dow. But, once again, this data was released at 8:30 eastern and while the report was encouraging, I will once again point out that the Dow opened down about 50 points.

Yet another report suggested that China’s better-than-expected CPI report was the culprit for the cheery mood on the street. The thinking here is that with no inflation in the picture, the Chinese Central Bank won’t have to raise rates again. This, in turn, led to hope that China will be able to continue to lead the global economy out of the doldrums. But, in case it isn’t obvious, this data was also available to traders long before the opening bell.

I get the fact that these news stories aren’t written for market junkies like you and me. But sometimes these reports can be downright misleading. Take the idea that it was the EU backing of Greece that was responsible for the rally as an example. For starters, everybody already knew the EU was going to do something so the news was a non-event. And the reality is that the markets were actually disappointed that we got almost nothing in the form of details on the plan. Oh, and don’t forget that the EU President also noted that Greece hadn’t even officially asked for help yet – which is an indication that it might be a while before any resolution is actually formed.

So, why then did the market suddenly pop higher over a 30 minute span at mid-morning on Thursday? While the answer doesn’t make for a good headline, the bottom line is stocks surged as the dollar plunged. We could argue about cause and effect as well as which is the tail and which is the dog, but if you want an answer as to why the market made its move, you need look no further than the chart of the greenback.

Speaking of the charts, we should point out that yesterday’s move occurred on less than stellar volume and appeared to stall out as the S&P approached near-term resistance. In all honesty, I’m not trying to be a spoilsport here. We’ve been saying that stocks are “set up” for a rally and that a move up into resistance made sense right about now. But, the fact that the move up yesterday did not appear to be in response to news but rather a drop in the dollar, leaves me a little skeptical.

Turning to this morning, the news that China increased the reserve requirement for banks by 0.5% for the second time this year has put the market back on their heels a bit. This move was completely unexpected and a clear sign that the Chinese are intent on reigning in excesses.

On the economic front, the Commerce Department reported that Retail Sales rose in the month of January by +0.5%. This was above the consensus for an increase of +0.3%. When you strip out the sales of autos, sales were up by +0.6%, which, again, was a bit better than the consensus for an increase of +0.5%. And when you take out autos and gasoline, sales improved by +0.6%, which was better than the +0.5% consensus and Decembers drop of -0.3%.

Running through the rest of the pre-game indicators, the overseas markets are mixed as the news out of China came out late. Crude futures are down $1.32 to $73.96. On the interest rate front, we’ve got the yield on the 10-yr trading higher at 3.70%. Next, gold is moving down by $6.80 and the dollar is lower against the Yen and lower against the Euro and the Pound. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a lower open. The Dow futures are currently ahead off about 50 points; the S&P’s are down about 5 points, while the NASDAQ looks to be about 8 points below fair value at the moment.

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

Wall Street Research Summary

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