Let’s Play the Basing Game

Daily State of the Markets 
Friday Morning – May 28, 2010  

There are times when it is indeed difficult to see the forest for the trees. In short, with the high frequency trading games being played over the past couple of weeks, we are of the opinion that this is definitely one of those times.

However, assuming the bulls don’t fall on their faces in the next couple of days, probably the most important takeaway from the recent action is it appears (well, to us, anyway) that stocks are now in the process of forming a base. And while anyone who has felt “long and wrong” lately would likely prefer to see the market just keep on keepin’ on to the upside, that isn’t how the game is usually played.

Unfortunately, the basing process involves a continuation of the volatility that usually occurs at bottoms and then a period of backing-and-filling as our two teams battle it out for control of the game. But the good news is that as long as the downtrend does not resume on a closing basis, the bulls will argue that a nearly 15% intraday correction is probably sufficient and that somebody, somewhere ought to start looking on the bright side again in the near future.

But before we get too full of optimism this morning, let’s remember the old cliché “the bigger the base, the bigger the move.” Although this market turns on a dime these days, we need to understand that it may take a while for the bulls to get their act together. Let’s remember that the causes of the decline haven’t gone away to any great degree and that the market will likely continue to be driven by the news flow. Thus, we would not be surprised to see another trip down to the S&P 1070 zone to test the recent lows at some point.

Perhaps the biggest argument we have for the market having entered a basing phase is that stocks roared ahead on Thursday, breaking through some important short-term resistance in the process. The move was set up by the oversold condition and the extremely negative sentiment that had taken over the market. But, as always, an oversold market and a dour mood are almost never enough to change the trend. No, it was China’s State Administration of Foreign Exchange (SAFE) firmly denying Wednesday’s media report that it was reviewing its Eurozone debt holdings that produced the trigger for Thursday’s 285 point gain.

To be sure, the bulls’ romp higher on Thursday definitely felt good and it did spruce up account values. However, given the fact that we are faced with a long holiday weekend and that today is the last trading day of May, it is probably a safe bet that the upside surprise may also have been related to short-covering, window-dressing, and the computer-driven trading that has made life miserable at times over the past month.

Turning to this morning… Things are fairly quiet for a change as it is a safe bet that many traders may already be on their way to the beach for the long weekend.

On the economoic front, Personal Incomes were rose by +0.4% in April, which was in line with the consensus expectations for an increase of +0.4%. March’s reading was revised upward to +0.4% from +0.3. Personal Spending for the month was unchanged, which below the expectations of +0.3%. March’s reading for spending was unrevised at +0.6%. On the inflation front, the PCE Core rose by +.1.2 over the past year while the PCE Deflator was up +0.1 in April and up +2.0% over the past year.

Finally, best of luck on this Friday and be sure to enjoy the long holiday weekend!

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: +1.82%
  • Shanghai: -0.01%
  • Hong Kong: +1.73%
  • Japan: +1.28%
  • France: +0.21%
  • Germany: +0.54%
  • London: +0.69%

   

• Crude Oil Futures: +$0.79 to $75.34
• Gold: +$1.20 to $1213.10
• Dollar: Lower against Yen, Up vs. Euro, Pound
• 10-Year Bond Yield: Currently trading at 3.32%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: flat
  • Dow Jones Industrial Average: -10
  • NASDAQ Composite: +3  

Wall Street Research Summary

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