Following The Script

Daily State of the Markets 
Friday Morning – May 14, 2010  

I’ve been around long enough to have seen a “crash” or three. While these experiences are never pleasant (even when you are on the right side of the trend), I have learned that the recoveries tend to look rather similar on the charts. And although last week’s “flash crash” may or may not have been a wee bit artificial (time will tell), so far at least, the recovery appears to be keeping to the script.

Generally speaking, once the initial waterfall decline ends, the market usually experiences a furious rebound. This short and sharp reflex move tends to see the indices recover a fair amount of the drop and in the process, convinces investors that it might be safe to get back into the water. But right about that time, the “reason” behind the big dive tends to rear its ugly head again. This creates a pullback that will either become what technicians call a “retest,” and end just as quickly as it started, or take a more serious tack, which includes the indices moving to new lows.

So, if (and please understand that this is a mighty big “if”) what we saw last week was some version of a “crash” and IF the market continues to follow my rendition of the crash script, we might just see some additional downside action in the near future.

Putting the crystal ball aside, although the market’s late-day slide may have surprised investors, there were actually plenty of reasons for those favoring the dark side to have done some selling.

For starters, it appears that the last hour plunge was tied to a breakdown in the Euro. While the stock market has not had much of a correlation to the Euro in a broad sense, yesterday it appeared to. The thinking is that if there is a reason for the Euro to fall then that is probably a bad thing for stocks as well. So, with the Euro moving to new lows, stocks followed suit Thursday afternoon. The reasons behind the Euro’s decline are pretty straightforward at this point as the worry is that the current EU/IMF plan just won’t work.

Next up, there was a fair amount of chatter in hedgieland that Cisco’s (CSCO) cautious comments about Europe could be extrapolated to all businesses in Europe as both the debt crisis and the volcano could slow the pace of business.

The new legal problems for America’s banks was also a sore spot for investors yesterday. Sure, NY Attorney General Andrew Cuomo’s allegations may be hypocritical and more political posturing than anything else. But as Larry Kudlow put it, we appear to be seeing an all-out attack on the banks. Heck, even AIG is now talking about going after Goldman to recoup some cash.

Next, the fact that the SEC still hasn’t made an official pronouncement as to the cause behind last Thursday’s “flash crash” may be weighing on investors. And the fact that it may take 60 days or more to get a fix in place doesn’t do much to boost confidence in the markets.

Finally, the technicians tell us the fact that the S&P once again failed at the 50-day simple moving average isn’t a good sign. And the fact that there wasn’t much in the way of news to push the Dow down triple-digits has the bears talking about more selling to come. We shall see.

Turning to this morning… stocks are moving lower on renewed concerns in Europe as credit default swaps are deterioriating.

On the economic front, the Commerce Department reported that Retail Sales rose in the month of April by +0.4%. This was above the consensus for an increase of +0.2%. When you strip out the sales of autos, sales were up by +0.4%, which was a in line with the consensus for an increase of +0.4%. And when you take out autos and gasoline, sales improved by +0.4%, which was above the +0.3% consensus but below March’s revised reading of +1.3%.

Finally, enjoy your Friday and have a pleasant weekend…

Pre-Game Indicators

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

• Foreign Markets: Down hard across the board
• Crude Oil Futures: -$0.98 to $73.41
• Gold: +$18.00 to $1247.20
• Dollar: Higher against Yen, Euro and Pound
• 10-Year Bond Yield: Currently trading down at 3.49%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -10
  • Dow Jones Industrial Average: -72
  • NASDAQ Composite: -15  

Wall Street Research Summary

Upgrades: