Just A Lot Of Noise?

Daily State of the Markets 
Thursday Morning – May 27, 2010  

Yesterday morning, we talked about the concept of asking the right questions when trying to determine the driving forces behind the stock markets movements. So with the market once again displaying an extreme level of volatility Wednesday afternoon, my main question was if the recent bouts of program selling were meaningful or just noise that needs to be filtered out?

At first blush, the fact that the market gave away a very nice gain and wound up finishing with a loss on Wednesday appeared to be simply horrendous price action. The words one of my colleagues used to describe the dive were, “this just isn’t good.” Another friend called to ask if the move from +140 to -69 qualified as an “ARF” (abrupt rally failure). And to be sure, the reasons behind the swoon were not encouraging as word that Germany’s bond auction had failed and that China was talking openly about losing some of its Eurozone debt holdings clearly caused the computers to “seek and destroy.”

On a chart basis, my colleague was correct – the price action definitely wasn’t good. It appeared that the rally, which stemmed from Tuesday’s key reversal, had bumped its head on resistance at 10,200 on the Dow and then turned tail and ran. Thus, Wednesday’s decline appeared to reverse the reversal – on increased volume, which, by definition, isn’t good at all.

However, knowing what was causing the programs to do a little selling here and there made it possible to ask the right question: Was China REALLY going to do anything about their holdings of Eurozone debt. For if they did want to suddenly start dumping the PIGIS’ bonds, the key question would become: Sell? To whom?

In addition, if one took a moment to think in between issuing sell orders, they’d realize that while China is famous for “talking the talk” and voicing their opinions about all kinds of global economic issues, there isn’t a darn thing they can do about the debt issued by the Eurozone at this point in time. Just like there is no way they are going to start selling dollars or U.S. Treasuries anytime soon. Thus, the bottom line is that China’s forex holdings are just too darn big to have any choice but to hold. Sure, they can voice their displeasure about the money they are losing, but there really isn’t much they can do about it at this stage of the game.

So, after enduring yet another day of “boys and their toys” (i.e. the high-powered computer generated trading programs) my key takeaway is the recent up-and-down action might just be part of the basing process. My recollection of waterfall declines is that they do end, but that the volatility tends to stick around for a while. So… unless the bears are able to break below the recent lows, it might be best to, like China, just hold on the next time the computers start running away with the market.

Turning to this morning… China’s State Administration of Foreign Exchange (SAFE) firmly denied the media report that it is reviewing its Eurozone debt holdings.

On the economoic front, the government’s report (1st revision) on the nation’s first quarter GDP shows the economy grew at an annualized rate of 3.0% in the first quarter, which was below the expectations for a growth rate of 3.4%, and below the 3.2% projected in the first read. In addition, the current quarter is down significantly from the 5.6% growth rate seen in the fourth quarter. Looking at consumer activity, the Personal Consumption component of the report came below expectations with a gain of 3.5%, which was below the estimates for 3.8% but well above and last quarter’s reading of 1.6%. On the inflation front, the GDP Price index was a tenth higher than expectations at 1.0% and the Core PCE was a in line with consensus at +0.6%.

In addition, the Labor Department reported that initial claims for unemployment insurance for the week ending May 22 fell by 14,000 to 460K. The week’s total was a bit above the Reuters consensus for a reading of 455K. Continuing Claims for unemployment for the week ending May 15 were a smidge below consensus at 4.607M vs. expectations for 4.613M. For comparison purposes, last week’s revised total was 4.636M (from 4.625M).

Finally, regardless of the color on the screen, make every effort to enjoy the day…

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: +1.59%
  • Shanghai: +1.15%
  • Hong Kong: +1.22%
  • Japan: +1.23%
  • France: +1.98%
  • Germany: +2.37%
  • London: +1.89%

   

• Crude Oil Futures: +$1.78 to $73.29
• Gold: -$6.40 to $1207.00
• Dollar: Higher against Yen, Euro, and Pound
• 10-Year Bond Yield: Currently trading at 3.28%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +15.5
  • Dow Jones Industrial Average: +118
  • NASDAQ Composite: +29  

Wall Street Research Summary

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