Playing the Hand You’re Dealt

Daily State of the Markets 
Friday Morning – April 9, 2010  

One of my favorite Wall Street clichés is that traders need to trade the market they have, not the one they want. In short, anyone in the bear camp these days had best remember this as the relentless march higher has left many a short seller dead on the side of the road over the past two months.

Yesterday’s action proved that this remains the bulls’ game to lose. After succumbing to some selling on Wednesday and then opening lower on Thursday, the bears had a golden opportunity to put some fear back in the market and to score some points for their team. However, despite a mixed bag of data inputs, which included some negative news, our furry friends were simply pushed aside by the big, bad bulls once again.

On the negative side of the ledger, the bears had the report on Weekly Jobless Claims and further deterioration in Greece to work with. Although the March Jobs report showed that the economy is creating jobs, the weekly update on initial claims for unemployment insurance was seen heading the wrong direction Thursday. Analysts had expected to see the weekly claims number decline to 435K. But instead, the report showed that 460K people had filed for unemployment during the week.

In addition, the situation in Greece would appear to favor the bear camp these days. While the EU and the IMF have pledged assistance to Greece as a measure of last resort, bond investors aren’t buying into the plan and definitely are not playing nice at the moment. Bond yields continue to soar with the Greek 10-year note yield hitting a record high Thursday of 7.5%.

This one-two punch of negativity pushed stocks down far enough after the open to test the bulls’ confidence as the indices flirted with their short-term moving averages and recent support zones. However, just about the time our friends in fur appeared to be making some headway, they appeared to fumble the ball – again.

The popular press awarded credit for the turnaround in stock prices on the strong same-store sales numbers from the nation’s retailers. However, truth be told, these results were available before the opening bell rang. So, despite the fact that sales were indeed strong and better-than-expected across the board, it is hard to argue that this was the catalyst for the reversal of fortunes in stock prices.

A better explanation for the bulls’ comeback was the release of the results from the Treasury’s 30-year bond auction. While everybody on the planet is happy to buy up as much short-term paper as the U.S. will print, there has been a good deal of consternation lately about the demand for longer-term debt offerings. And given the focus on sovereign debt ratings and the yields governments are forced to pay in the market to borrow, those seeing the glass as half empty argued that the demand for 30-year bonds just wouldn’t be there.

But, once again, the bear camp got it wrong as the bond auction was actually very well received. Thus, traders were able to breathe a sigh of relief and cover some shorts in the process.

This is not to say that we feel the market will simply continue to march higher from here. However, I have been around long enough to have seen this type of relentless melt-up before. And the bottom line is that until the bears can come up with a raison d’être, traders must indeed play the hand they are dealt and not the one they want.

Turning to this morning… We don’t have any economic data to review before the bell but we will get a report on Wholesale Inventories at 10:00 am. On the news front, UBS says that Greece may need assistance from the IMF within days while a spokesman from Germany said no one should doubt that the EuroZone and/or the IMF would rescue Greece if needed.

Running through the rest of the pre-game indicators, the major overseas markets are higher across the board. Crude futures are up $0.62 to $86.01. On the interest rate front, the yield on the 10-yr is currently trading at 3.92%. Next, gold is up $3.90 to $1156.80 and the dollar is lower against the Yen, Euro, and Pound. Finally, with about 60 minutes before the bell, stock futures in the U.S. are pointing to a stronger open. The Dow futures are currently ahead by about 31 points; the S&P’s are up about 4 points, while the NASDAQ looks to be about 6 points above fair value at the moment.

Wall Street Research Summary

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