Game Back On!

Daily State of the Markets 
Friday Morning – November 5, 2010  

After a brief hiatus filled with lots of intraday volatility but virtually no price progress, traders could be heard yelling “game back on” yesterday in response to the launching of QE II. In short, it was back to business as usual on Thursday. And with the dollar plunging to new lows for this cycle, traders put the “risk trade” back on, which, by the way, was one of the stated goals of Bernanke & Co’s latest campaign.

The impressive pop in the indices pushed the DJIA up 220 points to its highest level since September 2008 and even the S&P 500 got into the act by finally eclipsing its May highs. And on a chart basis, even the most ardent bears will have to admit that yesterday’s blast represents a breakout of sorts as well as a continuation of the current rally phase.

The keys to the session were easy to identify. The falling dollar gave traders a familiar path to follow as it was game back on for long trades in stocks, commodities, and emerging markets. Along those lines, the global recovery trade was also back on yesterday in response to the Fed’s commitment to do just about anything in order to try to get the U.S. economy moving forward. Ben Bernanke even went so far as to write and Op Ed piece in the Washington Post to explain the FOMC’s action. Thus, the bottom line here is traders seemed to embrace the old adage “Don’t fight the Fed” (especially when they are on a mission!).

However, we would be remiss if we didn’t mention the changed political landscape. A conciliatory tone from the White House gave traders hope that the Bush Tax Cuts would be back on (the table) and that the Republican’s agenda would be more pro-business (or at least less anti-business).

Another key to yesterday’s joyride to the upside likely relates to a little something called performance anxiety. With the S&P now within spitting distance of seeing a 10-handle on its YTD return, fund managers with cash on the sidelines would appear to be throwing in the towel. Since there are less than two months left in the year and a fund manager’s bonus is usually tied to outperformance of the SPOOZ (aka the S&P 500), now is not the time for managers to suddenly be conservative.

Speaking of the calendar, it is important to note that we are rapidly approaching the most wonderful time of the year. It is no secret that stocks have a historical tendency to head up into the New Year’s celebrations – and this is especially true when the calendar includes a mid-term election.

And finally, there is the matter of the shorts being run out of town yesterday. Anyone putting shorts on in anticipation of the much ballyhooed “sell the news” trade (which, as we had opined, seemed just a little too popular and too easy this time around) had to be thinking about tossing in the towel yesterday. And as one old-timer futures trader put it, “We are above the year’s open, the second half’s open, the quarter’s open, the week’s open, and the day’s open – what’s not to like?”

To be sure, stocks are indeed overbought and due for a pullback. However, given the “game back on” mentality that may be developing here, we might see the dip buyers start to come in early and often during any weakness as just about all news can be viewed as good news these days.

Turning to this morning… we’ve got the Big Kahuna of economic data – The Jobs Report – so let’s get to it.

The Labor Department reported that Nonfarm Payrolls, which is arguably the most important gauge of the state of the economy at the present time, rose in the month of October by 151,000. This was well above the consensus estimates for an increase of 55,000. The private sector (aka the household survey) showed gains of 159,000 jobs, which was again well above the estimates for 62,000K. September payrolls were revised higher to -41K from -95K. September Private Payrolls revised higher to +107K from +64K. The nation’s Unemployment Rate held steady at 9.6%, which was in line with expectations for a reading of 9.6%.

Finally, best of luck on this Friday and be sure to enjoy the weekend!

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: +1.15%
  • Shanghai: +1.38%
  • Hong Kong: +1.39%
  • Japan: +2.86%
  • France: -0.12%
  • Germany: -0.17%
  • London: -0.22%

   

• Crude Oil Futures: – $0.04 to $86.45
• Gold: – $3.70 to $1379.40
• Dollar: lower against the Yen, higher vs. Euro and Pound
• 10-Year Bond Yield: Currently trading at 2.503%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +4.24
  • Dow Jones Industrial Average: +24
  • NASDAQ Composite: +4  

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

Wall Street Research Summary

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