It’s Come To This?

Daily State of the Markets 
Friday Morning – January 14, 2011  

Good morning. With about an hour to go in yesterday’s trading session and the Dow off about 50 points or so, I took a call from a colleague who sounded rattled. The questions came in rapid fire fashion… “Is this it? Is it over? Should I start selling now? What if this keeps going? Whadda ya think?”

After a quick eye-roll, I resisted my immediate urge to launch into an uber-sarcastic diatribe. I thought to myself, has it really come to this? The Dow drops 50 points and suddenly I’ve got hand-holding duty?

Frankly, the call took me by surprise. After a month and a half of up, up, and away, my assumption was that everyone on the planet ought to be able to handle a few days of downside action. So, the more I thought about my colleague’s tone, the more flabbergasted I became.

But instead of screaming “Are you kidding me with this?” I took a breath. In a calm voice I then attempted to counter the absurd with, well, the absurd. “First off,” I said, “It depends on what ‘it’ is. Next up: Is what over? The Bull Market? January’s joyride? The good news on the economy? The commodity rally? Idols’ time at the top? The dominance of the P.C.? I mean, come on, give a guy some direction here.”

I won’t bore you with all the details of the call as we both wound up laughing off the silliness of the opening round of questions. He said that he had just finished reading my piece on the cycles and was really asking if I thought this cycle was ending. I pointed out that the bears were more than “due” for a day or three in the sun and that after such an impressive run, unless the downside action became violent, we should probably give the bulls the benefit of any doubt.

I then asked him to make a list of everything he wished he would have owned over the last four and one-half months. We talked about Apple (AAPL), small caps, oils, commodities, industrials and tech. I then suggested that he take a look at the charts of his ‘shoulda-coulda-woulda’ list and find spots where he’d be willing to start accumulating a position.

The point to this little exercise wasn’t so much about trying to determine entry points to the market’s leaders but rather to identify where the market or any of these positions might find support if the long-awaited pullback ever gets going. After I explained what we were doing, it was like a light bulb went on and we had an ah-ha moment on our hands.

“I get it,” he announced, “So I shouldn’t worry too much about any downside action unless these leaders blast through my buy points on heavy volume – is that what you’re saying?”

“Exactly,” I replied.

So, if you find yourself worrying about how far the market might slide during the inevitable corrective phase that is bound to start one of these days (or weeks), try this exercise on your own. Ask yourself, where would I be a buyer if I didn’t own anything?

The problem with this seems to be that with just about everyone on the Street talking about a big year for U.S. stocks, there appears to be a whole bunch of people who don’t want to miss out. So until that money gets put to work, our little exercise might be a waste of time. But I’d do it anyway, because it has come to this.

Turning to this morning… Intel’s (INTC) earnings after the bell initiated a positive tone for the global markets. However, word that the Chinese were increasing reserve requirements on banks again in order to fight inflation and property prices, has put a damper on the mood.

On the Economic front… The Commerce Department reported that Retail Sales rose in the month of December by +0.6%. This was below the consensus for +0.8%. When you strip out the sales of autos, sales were up +0.5%, which was also below the consensus for an increase of +0.7%. Sales for the month of November were unrevised at +0.8%. Ex-autos, November sales were revised lower to +1.0% (from +1.2%).

Next, the Consumer Price Index for December rose by +0.5%, which was above the consensus for +0.4% and also November’s reading of +0.1%. When you strip out food and energy, the so-called Core CPI came in with a gain of +0.1%, which was in line with expectations and November’s +0.1%

Thought for the day: Best of luck on this Friday and be sure to enjoy the weekend!

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell…

• Major Foreign Markets:
  • Australia: +0.14%
  • Shanghai: -1.31%
  • Hong Kong: +0.18%
  • Japan: -0.86%
  • France: -0.35%
  • Germany: -0.51%
  • London: -0.74%

   

• Crude Oil Futures: – $0.98 to $90.42
• Gold: – $22.60 to $1364.40
• Dollar: lower against the Yen and Pound, higher vs. Euro
• 10-Year Bond Yield: Currently trading at 3.333%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -3.06
  • Dow Jones Industrial Average: -34
  • NASDAQ Composite: -3.28

Wall Street Research Summary

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