Is a Change Afoot?

Daily State of the Markets 
Monday Morning – September 13, 2010  

Good morning. A trading range environment tends to challenge both the mental toughness and the conviction of investors. During extended trading range markets, the trends tend to be short and sharp (in both directions), but then die out quicky as the upper and/or lower reaches of the range are approached. It is for this reason that whenever we find ourselves in range bound environment, we tend to “turn off” our intermediate-term trend-following indicators and instead rely on an old Wall Street saw relating to trading ranges: “Do nothing, absolutely nothing, until there is something to do.”

Of course, this rule does not apply to those that tend to play the game from a short-term perspective. For the nimble, a range bound market may provide plenty of opportunities to “mount up” and “ride the range” via a strategy of buying the low end and selling the high end of the range.

Although the idea of “riding the range” sounds appealing, there is a risk to blindly playing this game. As anyone who has been around the investment biz a while will readily attest, Ms. Market’s game is rarely easy for long and she has a tendency to frustrate the masses whenever she has the opportunity. As such, whenever a game such as buying the low end of the trading range and selling the top end of the range becomes too popular, the range tends to break. Thus, the risk is that anyone “riding the range” will eventually be on wrong side when one of the teams is able to finally break on through to the other side.

Of course, the problem for anyone betting on a breakout is the fact that the longer a range remains intact, the stronger its upper and lower reaches become. Thus, the longer a range exists, the tougher it is for either team to make a break for it.

Such is the case at the present time. Friday’s market drifted higher on some better-than-expected news out of France and then this morning, stock markets around the globe are rallying on word that the new bank capital requirements from the Basel III banking committee were not as severe as had been feared and provide banks with a sufficiently long time frame to make the required changes to balance sheets.

To anyone not keen on chart watching, such news might be a signal that it is safe to jump back into the pool and that it is time to “buy ’em” with both hands. However, a quick glance at the charts shows that this morning’s early rally is likely to push the indices smack into the top end of the trading range a the open.

So… the question we all have to ask ourselves this morning is if there is a change afoot. Are either the data out of China or the report from Basel III game changers? If your answer is yes, then you’d best begin preparing for a breakout to the upside. But if your answer is no, then “fading” the top end of the range is the way to play.

What’s our take, you ask? As I’ve said a time or twenty over the years, we don’t like to make predictions and instead prefer to let Ms. Market do the talking. Therefore, we’ll be watching closely to see if the bulls have the firepower to break on through to the other side.

Turning to this morning… there is no data scheduled for release before the opening bell this morning. However, the pre-game indicators are pointing higher at the present time.

Finally, try doing something nice for someone today (for no reason at all)…

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: +1.16%
  • Shanghai: +0.94%
  • Hong Kong: +1.89%
  • Japan: +0.89%
  • France: +1.07%
  • Germany: +0.90%
  • London: +1.13%

   

• Crude Oil Futures: + $0.68 to $77.13
• Gold: – $1.60 to $1244.90
• Dollar: higher against the Yen, lower against the Euro and Pound
• 10-Year Bond Yield: Currently trading higher at 2.8.12%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +8.00
  • Dow Jones Industrial Average: +80
  • NASDAQ Composite: +16.04  

Wall Street Research Summary

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