Entering the Blow-Off Stage?

Daily State of the Markets 
Wednesday Morning – March 24, 2010  

Stocks put on another impressive show on Wednesday as the Dow finished higher for the tenth time in the last eleven sessions. In addition to the sea of green that adorned my screens on Tuesday, I noticed that a column on my quote page sported a bright blue hue at the close. Yep, that’s right, it had been so long since the majority of the indices and stocks that I follow hit new 52-week highs, I had forgotten that they turn a bright shade of cyan when such an event occurs. So upon further inspection, we should take note that the S&P 500, DJIA, NASDAQ, Russell 2000, and the S&P Midcap indices all hit new 52-week highs Tuesday – with the Dow finishing at its best level in 17 months.

Okay enough of the game summary statistics; let’s get to the matter at hand – the reason behind the new highs for the U.S. stock market indices. It is interesting to note that there was no single trigger to Tuesday’s joyride to the upside. The economic headlines were relatively benign, earnings season is winding down, and there didn’t appear to be any analyst catalyst that we could point to as the reason behind the move. And yet almost from the outset, stocks worked their way higher.

So, why are stocks still movin’ on up right now? In short, welcome to what might just become the blow off stage of this bull market.

Anyone who has been around a while knows that one of Wall Street’s credos is: If something is worth doing then it is definitely worth overdoing. In English, most bull markets include a phase where money managers throw up their hands and just buy. They forget about being patient and buying on pullbacks. Instead, limit orders become market orders and cash is put to work. And as you might suspect, when everyone on the street starts talking about the trend being their friend, well… the move becomes self fulfilling.

On Friday, all anybody could talk about was the idea that a correction was at hand. But by Tuesday, all we hear is how the current rally is the start of a new bull leg. Thus, with the quarter rapidly coming to a close, it is a safe bet that “fear of missing out” might be taking hold. Remember, a year ago, it was positive to have cash on your books. However, with the market on a roll, investors may look at cash in a different light right now.

To be fair, the combination of a better-than-expected 2-year note auction and comments from Janet Yellen seemed to provide the spark that got things really rolling yesterday afternoon. Ms. Yellen, who is not only the President of the San Francisco Fed but also expected to replace Don Kohn as the Vice Chairman of the Federal Reserve Board this summer, said that there is no urgency to tighten monetary policy any time soon.

So, with assurances that the punch bowl will likely remain available a while longer, traders embraced the idea that the economy is improving, that the upcoming jobs report might be better than expected, that playing the short side is definitely the wrong side, and that a breakout to new highs just might lead to more new highs – especially if everybody else plays along!

Turning to this morning… The big news is that another of the PIGI’S may be in trouble as Fitch downgraded Portugal’s credit rating. While Fitch was in the middle of Moody’s and S&P to begin with, the news reinforces the fact that the problems with debt and budgets aren’t going away any time soon.

On the economic front, the Commerce Department reported that Durable Goods orders grew by +0.5% during the month, which was below the consensus expectations for +0.6%. However, January’s reading was revised to +3.9% (Up from +3.0%). When you strip out the volatile orders for transportation, orders in February increased by +0.9%, which was above the consensus for +0.6% and January’s unrevised reading of +0.6%.

Running through the rest of the pre-game indicators, Asian markets are higher while European bourses are now lower on the Portugal news. Crude futures are down $1.36 to $80.55. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.77%. Next, gold is moving down $14.70 to $1089.00 and the dollar is higher against the EUro and Pound, but lower against the Yen. 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 off by about 33 points; the S&P’s are down about 5 points, while the NASDAQ looks to be about 6 points below fair value at the moment.

Wall Street Research Summary

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