Downgraded?

Daily State of the Markets 
Wednesday Morning – April 28, 2010  

The S&P downgrades of both Greece and Portugal’s sovereign debt rating yesterday put the bears back in business as fears of default and contagion came screaming back to the front burner. Although the news wasn’t exactly unexpected and the current yields on Greek debt tell the whole story (2-year notes traded at over 20% yields yesterday), the reality that Greece’s sovereign debt is now officially rated as junk certainly put things in perspective.

This was exactly the type of ugly day we had been so concerned about over the past couple of weeks. However, in light of the fact that the bulls had been able to brush aside any and all bad news of late, it has paid to stay with the trend. But the real question facing traders and investors this morning is if yesterday’s action downgraded the outlook for equities over the intermediate term.

There is no denying the fact that stocks had been set up for a pullback. The indices were all wildly overbought after a +15% run in just two months, and sentiment had become entirely too optimistic. As such, the bears had been desperately looking for some sort of catalyst to get their downside party started. And after eleven long weeks, it appears that our furry friends finally found what they were looking for.

After being unable to even get in the game since early February, the bears were able to overcome some pretty darn good news yesterday. Before the dueling downgrades were announced, the bulls were working their way higher once again in response to improvements in consumer confidence and the Case/Shiller home price index as well as the Richmond Fed Manufacturing Index, which came in more than double expectations. But as is often the case when a wave of selling gets started, fear of what may be ahead allowed the bears to make some headway.

So, will the 200+ point down day be enough to derail the bull train? Should we downgrade the outlook and look for more selling ahead? The charts tell us that while Tuesday was indeed ugly, yesterday’s bout of program-induced selling may not be a reason to abandon ship just yet. Although the Dow and S&P are now flirting with an important support zones, the charts of the market-leading Russell 2000 and S&P Midcap indices remain in pretty good shape. And in short, the market leaders have done a good job of foreshadowing what lies ahead this year.

So, we would not be surprised to see some additional selling – especially today or in response to progress on financial regulatory reform. However, the bulls will suggest that this type of pullback usually sees prices decline between 3% and 5% off the top. And with the S&P now down -2.75% off the top, our heroes in horns will argue that much of the damage may have already occurred and that the dip buyers may return in the next day or two. We shall see.

Turning to this morning… We don’t have any economic data to review before the bell. However, we will get the Fed’s latest statement at the conclusion of their two-day meeting this afternoon.

On the news front, Greece has banned short-selling on their stock market and the expectation is that we will see a resolution of the bailout package announced later today. This

Running through the rest of the pre-game indicators, with the exception of London which has moved up recently with the U.S. futures, the major overseas markets are lower across the board. Crude futures are up $0.24 to $82.68. On the interest rate front, the yield on the 10-yr is currently trading at 3.73%. Next, gold is off $0.30 to $1161.90 and the dollar is higher against the Pound but lower against the Yen and Euro. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a stronger open. The Dow futures are currently ahead by about 55 points; the S&P’s are up by about 7 points, while the NASDAQ looks to be about 16 points above fair value at the moment.

Finally, regardless of the color on the screen, make every effort to enjoy the day…

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

Wall Street Research Summary

Upgrades: