New Words, New Direction?

Daily State of the Markets 
Thursday Morning – July 22, 2010  

The stock market can be a difficult game, to say the least. However, one thing is for certain; traders don’t like surprises. And a surprise is what they got yesterday afternoon from Ben Bernanke’s semiannual testimony on monetary policy before the Senate Banking Committee. While most analysts expected the Fed Chairman to simply reiterate the minutes from the June 22-23 FOMC meeting, Mr. Bernanke threw in some new words to help him describe the state of the economy. In short, those new words meant a new direction for the stock market – down.

Up until the time Gentle Ben uttered the words “unusually uncertain,” stocks had been enjoying a decent day and it felt like the market might move higher at any moment. However, the new phrasing by the most powerful banker in the world took traders by surprise. And while the new words did not appear to change Mr. Bernanke’s outlook on the economy, the change was good enough to create some uncertainty. With that uncertainty came a chain reaction of computerized sell programs and before you determine if the words were actually new, the DJIA had plunged 150 points.

The worry, of course, was that the Fed Chairman, who is known as being a good communicator with the markets, was making a change in the Fed’s assessment/outlook on the economy. The worry was that the Fed saw something that traders didn’t. And the worry was that with the Fed being out of bullets in its monetary holster that the current ‘soft patch’ in the economy might get worse going forward.

Was anything of that nature said by Mr. Bernanke during his testimony? In a word, no. Was there any inference that the economy was going to double-dip? No, just the opposite actually as Bernanke specifically said the FOMC does not see the economy dipping back into recession. Was there any talk of the Fed needing to step in? Well, not exactly. However, the Fed Chairman DID say that the Fed does have other tools available to them and that they stood ready to use them.

So, when you step back a moment and look at what was actually said by Mr. Bernanke, it appears that the stock market may have overreacted a teensy bit. But with the HFT boys and their toys running the show these days (remember, it is estimated that high-frequency trading programs now account for nearly 70% of daily trading volume) an overreaction is what we’ve come to expect on a daily basis.

Thus, the question posed in yesterday’s title (Any Meaning?) seems to be appropriate again this morning. While we would like to simply wave off the action and blame the quants and their algorithms, we were a bit concerned with the action in the bond market. Thus, we will suggest that there may have been a bit of an overreaction, but we’ll also be keeping a close eye on the bond pits for clues on the economic outlook.

Turning to this morning… Markets are trading higher in the early going on the back of strong economic data out of Europe and optimism surrounding the results of bank stress tests due out tomorrow.

On the economic front… The Labor Department reported that initial claims for unemployment insurance for the week ending July 17th rose by 37,000 to 464K. The week’s total was well above the Reuters consensus for a reading of 446K. Continuing Claims for unemployment for the week ending July 10 were below consensus at 4.487M vs. expectations for 4.607M and last week’s 4.681M.

Finally, remember to take time to enjoy your day…

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: -0.77%
  • Shanghai: +1.07%
  • Hong Kong: +0.50%
  • Japan: +0.62%
  • France: +1.81%
  • Germany: +1.56%
  • London: +0.91%

   

• Crude Oil Futures: + $0.43 to $76.99
• Gold: – $5.20 to $1186.60
• Dollar: lower against Yen, higher vs. Euro and Pound
• 10-Year Bond Yield: Currently trading higher at 2.91%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +9.36
  • Dow Jones Industrial Average: +75
  • NASDAQ Composite: +17.80  

Wall Street Research Summary

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