Having Second Thoughts?

Daily State of the Markets 
Friday Morning – November 12, 2010  

Publishing Note: I am traveling on Monday and Tuesday and will not publish a morning “State” report. Daily State of the Markets reports will return on Wednesday.

Although the damage was not terribly significant, stocks floundered again on Thursday as it appears that traders may be starting to have second thoughts about continuing to buy stocks. After such a glorious run higher over the past two and one-half months, some profit taking, a pullback, or even a correction is certainly to be expected. But so far at least, the bad-news bears have been unable to produce even a -2% pullback since the run began.

Despite the impressive uptrend, we will have to admit that the action is starting to get a little sloppy and that there are a few divergences cropping up. As such, if our furry friends are able to get something going to the downside, traders may begin to rethink the “don’t fight the Fed” trade that has been all the rage since late-August.

As things stand right here, the S&P is now off an even 1% from the November 5th high. However, it does appear that traders may be starting to have second thoughts about an abundance of issues. First, there is the concern that QE II will not be the panacea that Bernanke & Co. are counting on. The public outcry from places like China and Germany are hard to ignore. And even the inventor of the “Fed Put,” Alan Greenspan, has joined the fray by publically suggesting that another round of quantitative easing won’t help the economy to any great degree and create big inflation problems down the road.

After yesterday, traders may also be having second thoughts about economic growth expectations. While the bulls tried to argue that Cisco’s (CSCO) concerns about the future were company-specific, traders appeared to quickly play the extrapolation game regarding the company’s worry that capital expenditure plans from both the private and public sector may be waning.

Next up is China. Since the summer of 2009, the bulls have had the growth story in China to lean on whenever things got tense. In short, with China leading the world out of recession and growing at an impressive clip, our heroes in horns have been able to suggest that China will continue to lead the growth parade. However, with the Chinese now appearing to have commenced a tightening phase in order to combat inflation and a potential bubble in real estate, traders may be having second thoughts about even this old standby.

In addition, the mounting concerns about a trade/currency war could be causing traders to take a step back. While no one really expects anything to come out of the G20 meetings, this subject is certainly getting a lot of airtime given the recent actions by the Fed.

And finally, let’s not forget about the PIGI’S. Although stock markets generally don’t fall hard for the same reason more than once, this doesn’t mean that the mounting debt problems in Ireland and Portugal aren’t causing some of the bulls to second guess their near-term buying plans at current levels.

So, with a weekend upon us and some uncertainty in the air, we would not be surprised to see the dip buyers start to have second thoughts about their current game plan, which involves coming in to buy each and every intraday dip. But as the saying goes, the trend is your friend. So, unless and until the bears can get their party started, we should probably continue to give the bulls the benefit of any doubt for the time being from an intermediate-term standpoint.

Turning to this morning… Stock futures are pointing to a lower open on Wall Street on the back of concerns about the mounting debt problems in Ireland and expectations that China will continue to tighten rates.

On the economic front… There is no data to review before the bell, but we will get the University of Michigan’s Confidence index at 9:55 am eastern.

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: -0.65%
  • Shanghai: -5.16%
  • Hong Kong: -1.93%
  • Japan: -1.39%
  • France: -0.93%
  • Germany: -0.15%
  • London: -0.28%

   

• Crude Oil Futures: – $1.56 to $86.25
• Gold: – $14.40 to $1388.90
• Dollar: higher against the Yen, lower vs. Euro and the Pound
• 10-Year Bond Yield: Currently trading at 2.673%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -6.36
  • Dow Jones Industrial Average: -46
  • NASDAQ Composite: -9.1  

Wall Street Research Summary

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