Fear Versus Realilty

Daily State of the Markets 
Friday Morning – November 26, 2010  

Good morning. Wall Street is supposed to be all but vacant this week as traders and investors alike focus first on family and the Thanksgiving holiday, and then on their shopping lists for Black Friday and Cyber Monday. However, the historical tendencies appear to have been brushed aside this year as traders have struggled with the question of which is more important right now: fear or reality.

As you are probably aware, the historical tendency for the week of Thanksgiving is for prices to generally trend modestly higher in quiet trading. But with the sovereign debt situation refusing to go away and then North Korea’s new leadership anxious to show the world how tough they are, it has been a bit of a wild ride. In short, these two issues have put fear and uncertainty back on the table.

However, traders put their fears on the back burner on Wednesday in response to the reality that the U.S. economy appears to be improving. With just about everybody on the planet predicting this or that in response to what QE II might or might not due, traders may have lost sight of the fact that the U.S. economy is indeed moving forward – albeit at a pace that is less than inspiring. But, if the economy continues to improve, well, a lot of the fear and loathing about what the Fed and/or the government might do next becomes irrelevant.

This appears to have been the thinking on Wednesday as the Dow popped up 150 points and recovered all of Tuesday’s fear-induced dive. The romp higher was prompted by generally positive data as the weekly jobless claims fell another 34K to 407K, which was well ahead of expectations, personal incomes and spending continue to rise, and the UofM Confidence Index was well ahead of what analyst had been looking for.

While the bulls certainly enjoyed the move in the blue-chip indices, the real key to Wednesday’s action occurred elsewhere. Don’t look now fans but the Midcap index moved on up to a new high for this bull market cycle and the Russell 2000 finished within spitting distance of its recent high. And with the NASDAQ providing some renewed leadership, our heroes in horns definitely went home happy.

Turning to this morning… Unfortunately, the fears are back in a big way on both the sovereign debt front and the geopolitical front. The headlines out of Europe have been coming fast and furious, focusing primarily on the next shoe (or in this case, the next country) to drop – Portugal and Spain. In addition, word that the EU/IMF wants bondholders to share in the bailout pain has put the word “default” back on the table. One article out of Europe even went so far as to suggest that Ireland may start to default on debts as early as Monday.

And lest we forget, the North Koreans continue to try and garner attention on the world stage this morning as their central information agency is talking about war in the region in response to U.S.-South Korean military exercises being carried out this week.

On the economic front… We don’t have any data scheduled for release today. And remember that the fun and games on Wall Street ends early today at 1:00 pm eastern.

Finally, don’t let success go to your head or defeat into your heart…

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell…

• Major Foreign Markets:
  • Australia: +0.15%
  • Shanghai: -0.92%
  • Hong Kong: -0.77%
  • Japan: -0.40%
  • France: -1.52%
  • Germany: -0.86%
  • London: -1.09%

   

• Crude Oil Futures: – $0.95 to $82.91
• Gold: – $19.90 to $1353.10
• Dollar: lower against the Yen, higher vs. Euro and Pound
• 10-Year Bond Yield: Currently trading at 2.850%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -11.95
  • Dow Jones Industrial Average: -105
  • NASDAQ Composite: -21.20  

Wall Street Research Summary

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