Guess They’re Serious

Daily State of the Markets 
Wednesday Morning – January 27, 2010  

Good morning. Stocks actually had lots of reason to rally yesterday. Stocks were oversold and due for a bounce, the Bernanke worries were fading, the White House was making noise about putting a cease and desist order on spending, the consumer suddenly appeared to have a spring in their step, and Apple (AAPL) had once again put up some pretty good (although confusing as) numbers. And with the Dow up nearly 90 points at lunch, it looked like the dip buyers were back and the broken moving averages were a good buy program or two away from being recaptured by the good guys.

But just about the time traders might have been chastising themselves for thinking that a correction of more than -5% would actually occur again in their lifetimes, a report out of Reuters suggested that the administration’s recent threat to break up the banks might be something more than political bluster.

Given that it is natural for politicians to go in whatever direction the wind may be blowing at the time, there was a certain contingent of Wall Streeters that likely assumed the idea of effectively putting Glass-Steagall back together again had a snowball’s chance of becoming a reality. However, the one-line headline stating that Paul Volcker would testify in front of the Senate Banking committee next week made traders realize that this plan just might have some bite to accompany all that barking.

Dubbed the “Volcker Rule,” banks that accept insured deposits would no longer be able to partake in proprietary trading or be involved in hedge funds, and would be limited in size. And given that most every bank on Wall Street does trading and is in the hedge fund game, it wasn’t surprising that traders decided to sell first and ask question later in the last hour yesterday.

In addition to the populist war against Wall Street, there were some other reasons for traders to be a little hesitant to put money on the buy side yesterday. For example, sovereign debt concerns were back in the headlines after S&P moved their rating on Japan’s debt to outlook-negative. Then there’s the two-day Fed meeting that may or may not be influenced by the political wrangling surrounding Ben Bernanke. Next is the situation with the Secretary of Treasury, who will be testifying about AIG today. And finally, there is the State of the Union, which is bound to contain a barb or three about the evils of Wall Street, banking, and profits.

Before we leave the topic of trader trepidation, the tape action probably needs to be addressed. In short, the tape has been acting horribly now for a week. While the bulls can certainly turn this thing around with some good news, it appears that the character of the market is changing. No longer is bad news being ignored and every dip being bought. No, dare I say it; it now appears that traders might be using rallies as opportunities to sell. And if this action continues much longer, the long awaited “real correction” could become a reality.

Turning to this morning, we don’t have any economic data to review before the bell but we will get New Home Sales at 10:00 am and the FOMC’s rate decision at 2:15 pm eastern. We should note that the trend of late on “Fed Days” has been for stocks to rally in front of the announcement.

Running through the rest of the pre-game indicators, the overseas markets are lower across the board. Crude futures are up $0.17 to $74.88. On the interest rate front, we’ve got the yield on the 10-yr trading higher at 3.63%. Next, gold is moving down by $3.60 and the dollar is higher against the Yen and Euro, but lower against the Pound. Finally, with about 60 minutes before the bell, stock futures in the U.S. are pointing to a flat open. The Dow futures are currently off by about 3 points; the S&P’s are up about a point, while the NASDAQ looks to be about 2 points below fair value at the moment.

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

Wall Street Research Summary

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