Finally!

Daily State of the Markets 
Wednesday Morning – August 18, 2010  

Publishing Note: I have an early meeting Thursday and will not publish a morning report. Daily State of the Markets reports will return on Friday.

Good morning. Years ago, my wife and I were touring a Parade of Homes to get ideas for the home we were going to build. We were with a group of women that seemed to be rather unimpressed by the multi-million dollar homes on display. That is until we got to home #9, which had a massive waterfall flowing from the ceiling of the family room. When one of the ladies in the group spotted this rather unusual feature, she exclaimed, “Finally! Something good!”

Stocks displayed a similar reaction Tuesday after traders “finally!” got some good news on the economic front. While it seems like an eternity since we’ve been able to place the words better-than-expected in front of an economic report, the data on Industrial Production and Capacity utilization did indeed exceed the consensus expectations.

Early in the session, the Federal Reserve reported that Industrial Production had jumped +1% in July, which easily exceeded the expectations for an increase of +0.6%, as well as June’s reading of -0.1%. The report provided traders with support for the idea that the “soft patch” that the economy had experienced in June might be ending, or at the very least, that the country’s GDP was not about to stop on a dime the way it did in early 2008.

Unlike the way things have been going lately, the bulls “finally!” got some support from other areas as well on Tuesday. The earnings from consumer bellwethers Home Depot (HD) and Wal-mart (WMT) weren’t half bad; there was some new M&A activity (always a good sign from the bulls’ perspective); Ireland and Spain were able to auction off bonds without incident; we saw some positive data out of China for a change; Morgan Stanley was out with a note suggesting that stocks had overreacted to the Fed’s latest assessment of the economy; there was talk of stimulus in Japan; and “finally!” the bond market acted appropriately – meaning that yields halted their recent drop into the abyss.

The key to the session – as well as the bulls hopes for some additional upside – was the fact that the manufacturing data presented to traders was simply inconsistent a double-dip. In addition, the rise in the Producer Price Index (up +0.2% in July) was the first uptick in four months. And again, this is simply is inconsistent with the concept of deflation, which has been another big worry of the market lately.

While the bulls may have been able to “finally!” breathe of sigh of relief yesterday, the action didn’t do much to improve the charts. We still see both the short- and intermediate-term trends as neutral and range bound. So, until/unless one of the teams can finally break away from the current sideways pattern that has been in effect for nearly four months now, traders may want to stay in the saddle and “ride the range” — as the action is likely to continue to be driven by the news.

Turning to this morning… Stock futures are muddling around the breakeven mark in the early going. The news flow is fairly light with no economic data in the U.S. before the bell this morning. However, bond yields are falling again this morning and appear to continue to be the key to the action.

Finally, consider having a mind that is open to anything…

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: +0.02%
  • Shanghai: -0.21%
  • Hong Kong: -0.54%
  • Japan: +0.86%
  • France: -0.41%
  • Germany: -0.17%
  • London: -0.77%

   

• Crude Oil Futures: – $0.67 to $76.11
• Gold: – $1.20 to $1227.10
• Dollar: higher against Yen, lower vs Euro and Pound
• 10-Year Bond Yield: Currently trading lower at 2.60%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +1.10
  • Dow Jones Industrial Average: +4
  • NASDAQ Composite: -1.90  

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

Wall Street Research Summary

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