Nothing Matters Except

Daily State of the Markets 
Monday Morning – November 1, 2010  

Publishing Note: I am traveling on Tuesday morning and will not publish an early report. Daily State of the Markets reports will return on Wednesday.

Good morning. If you’ve been paying attention at all over the past few weeks, you can most likely complete the thought in today’s title. While I’d like nothing more than to offer some thoughtful analysis on the state of the market this morning, the only real thing that matters right now is the macro view and more specifically, the expectations for the Fed to launch the QE II on Wednesday.

Friday’s action was a pretty good example this concept. While traders have busied themselves with some intraday volatility lately, the overall picture seems to be one of a market positioning itself at an equilibrium point ahead of this week’s big events. So, with the dollar moving back toward its recent lows on Friday and bond yields starting to return from whence they came, the bulls once again refused to yield the right of way. As such, stock prices spent a seventh day hanging around the neutral zone.

But make no mistake about it; QE II is still the focus of the game right now. Perhaps one of the explanations for the sideways action of late can be attributed to the quiet period ahead of this week’s FOMC meeting. While there has been a fair amount of chatter from Fed officials relating to the expectations of Bernanke’s next move, the time for public discussion has ended. And although several Fed officials have tried to make it clear that there has been no decision on the renewed bond buying binge, market expectations now seem to have been steered away from the kind of “shock and awe” approach the FOMC employed during crisis and toward something a little more measured and dependent on the data.

While just about everyone under the sun expects Bernanke & Co. to announce a new initiative on Wednesday afternoon, the key question at this stage of the game seems to be the extent to which the markets have already priced in the results of this week’s big events. And although the focus of the market has clearly been on the FOMC, anyone trying to watch television lately has undoubtedly been reminded that there is a little election happening this week.

From a chart perspective, we appear to have a fairly nice consolidation pattern shaping up at the moment. As such, a close above or below the current boundaries of the formation is likely to be a precursor for the next move. And if one looks solely at the squiggly lines on the screen, it looks as if the bulls should be given the benefit of the doubt going forward.

However, let’s keep in mind that just about everyone under the sun has been talking about the idea of a “sell the fact” trade once the big events of this week finally come to pass. Frankly, this seems a little “too easy” to me as this type of trade isn’t usually this well publicized. But, we will remain open to the possibility that the bears could make a long-awaited return to the game come Wednesday afternoon.

Turning to this morning… Stock futures are being buoyed by better than expected manufacturing data in China and the UK.

On the economic front… Personal Incomes fell by -0.1% in September, which was a below the consensus expectations for an increase of +0.3%. The August reading was revised lower to +0.4% from +0.5%. Personal Spending for the month rose by +0.2%, which also below the expectations of +0.4% and the August revised reading of +0.5%. On the inflation front, the PCE Core was unchanged in September, below the consensus for +0.1%.

Finally, remember that there is more to life than increasing its pace…

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: +0.79%
  • Shanghai: +2.52%
  • Hong Kong: +2.41%
  • Japan: -0.52%
  • France: -0.42%
  • Germany: +0.17%
  • London: -0.01%

   

• Crude Oil Futures: + $0.76 to $82.19
• Gold: + $0.80 to $1358.40
• Dollar: lower against the Yen and Pound, higher vs. Euro
• 10-Year Bond Yield: Currently trading at 2.572%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +5.74
  • Dow Jones Industrial Average: +41
  • NASDAQ Composite: +8.0  

* Report includes items that make comparisons to the consensus estimate questionable

Wall Street Research Summary

Upgrades: