Fits and Starts

Daily State of the Markets 
Tuesday Morning – May 4, 2010  

It was the bull’s turn to run with the ball again Monday as stocks rebounded nicely from Friday’s drubbing. But while it was nice to see a triple-digit gain for the Dow and returns of between +1.3% and +2.3% on the rest of the major indices, it is important to recognize that the market is basically in the same spot it was three weeks ago. Thus, it is probably best not to get too discouraged when the bears have their way with the indices for a day or two or too excited when our heroes in horns put up a big number such as yesterday’s 143 point bounce.

Monday’s pop higher was sponsored by a series of positive events, or perhaps more importantly, a lack of any big negative events. We had opined that the primary reason for Friday’s bout of selling was the idea that traders had been fleeing the market in front of a weekend that could pose some fairly significant event risk. But, come Monday morning, the sky was still in its rightful place and as such, the dip buyers appeared to return to work.

To be fair, the bulls did have a couple of items worthy of their attention yesterday. The fact that Greece officially reached a deal with the EU/IMF was probably the biggest story allowing nervous traders to breathe of sigh of relief. However, the fact that Warren Buffett publically supported Goldman Sachs (GS) at the Berkshire Hathaway annual meeting was also viewed as a positive. To hear the bears tell it, Goldman’s clients were all likely to flee in response to the firm’s recent legal troubles, which, in turn, would have a ripple effect (and not in a good way) on the still fragile financial sector.

The economic calendar also provided the bulls with a bit of a lift on Monday. First, we got word that the consumer appears to be alive and well as Personal Income and Spending both increased in the month of March. Then we learned the manufacturing sector continues to expand as the April ISM Manufacturing Index came in above consensus with a reading of 60.4 (readings above 50 are indicative of economic expansion in the sector). The report also showed that New Orders were up nicely, Inventories were down, and the Employment index expanded to 58.5 from 55.1. And finally, we got word that Construction jumped unexpectedly in March. Analysts had expected an eleventh straight monthly decline, so the increase off +0.2% was a welcome surprise.

But before you break into a roaring rendition of “happy days are here again,” we should probably point out that yesterday’s price action wound up being something technicians call an “inside day.” This occurs when the high of a particular session is below the prior day’s high while the low of the day in question is above the prior day’s low. Such an event suggests that the prevailing trend prior to the session is likely to remain dominant. So, the bears will can be heard telling anyone who will listen that since the 10-day moving average is still moving down, yesterday’s fun in the sun didn’t change a darn thing.

Turning to this morning… It looks like the bears will get the ball again today. In the early going there is talk that the EU/IMF loan package for Greece will not be sufficient to cover the country’s needs for the next three years. Next, there are rumors that Spain may need as much as 280 billion Euros in aid (more than double the aid being provided to Greece over the next three years) and is facing an imminent debt downgrade. And finally, a decline in China’s PMI (Purchasing Managers Index – an indication of the health of the manufacturing sector) is causing the bears to talk about the potential for a slowdown in global economic growth.

Running through the rest of the pre-game indicators, the major overseas markets are lower across the board. Crude futures are down $1.29 to $84.90. On the interest rate front, the yield on the 10-yr is currently trading at 3.65%. Next, gold is up $5.00 to $1188.30 and the dollar is higher against the Yen, Euro and 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 off by about 60 points; the S&P’s are down by about 9 points, while the NASDAQ looks to be about 17 points below fair value at the moment.

Finally, be sure to keep everything in perspective…

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

Wall Street Research Summary

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