Pushing Back?

Daily State of the Markets 
Thursday Morning – July 29, 2010  

When stocks pull back from an overbought position, the key “tell” as to which way things will go from there usually shows up in the form of how much “oomph” the bears display during the decline. If the selling is intense and accompanied by some news or a change in the fundamentals, it is a safe bet that the rally phase is over and the bears have grabbed the ball. However, if the pullback is met with some buying, is unenergetic, and is not accompanied by any meaningful news, then the bulls argue that this type of pause will wind up being a well earned break in the upside action.

While the following judgment is purely subjective and I reserve the right to be misinterpreting the tea leaves, yesterday’s action appeared to be an example of the latter. And although we could certainly see some additional selling in the near-term, we’re of the mind that unless things change, being a dip-buyer might just be the way to go for a while.

In the early going, the bears appeared to have things going their way with a punk Durable Goods report, overbought conditions, and some serious overhead resistance sitting on their side of the ledger. And true to form, stocks pulled back. Then after the Fed released its Beige Book report, which showed that while the overall economy was indeed improving, a couple of Fed Districts were seeing a slowdown in economic activity. So, with new data showing that the economy was slowing, the bears pushed back on the idea that the everything is going to be ‘just fine, thank you,’ and it looked like things could get ugly.

While I’m sure to get some boo’s and at least a couple of emails with conflicting opinions, the bears seemed to lose their mojo late in the day. And instead of an HFT-sponsored trash-job into the close, things settled out in a relatively mild fashion. So, while I’m not big on predicting the future or going out on a limb for a market call (I prefer to let the market do the talking most of the time) it does appear that the bears may not have made their case on Wednesday.

The point is that a pullback to retest the 1100 level on the S&P 500 was certainly to be expected after Monday’s fun in the summer sun. And so far at least, it appears that said retest has been successful.

However, before you run out and buy some triple-long ETF’s on margin, it is probably a good idea to keep the current environment in mind. In short, we do not feel that we are embarking on a new leg of the bull market. Nor do we believe that new lows are imminent. As such, the most likely scenario – again, in our humble opinion – is a trading range environment while the argument about which way the economy is heading plays out. But, until and unless the bears can get a little more enthusiastic about their work, there just might be a little more upside in the current run.

What if I’m wrong, you ask? The technicians tell me that if 1100 breaks in a meaningful way, then a test of 1080 is likely to be forthcoming. And if that support zone doesn’t hold, then the bears are likely to explore the lower regions of the trading range. But for now, we’ll continue to watch the 1100 zone with great interest.

Turning to this morning… The Labor Department reported that initial claims for unemployment insurance for the week ending July 24th fell by 11,000 to 457K. The week’s total was 2K below the Reuters consensus for a reading of 459K. Continuing Claims for unemployment for the week ending July 17 were above consensus at 4.565M vs. expectations for 4.550M and last week’s 4.484M. Stock futures have improved in response to the report.

Finally, remember to smile at least once before lunch…

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: -0.13%
  • Shanghai: +0.55%
  • Hong Kong: +0.01%
  • Japan: -0.59%
  • France: +0.55%
  • Germany: +0.67%
  • London: +0.79%

   

• Crude Oil Futures: – $0.16 to $76.83
• Gold: + $0.20 to $1160.60
• Dollar: higher against Yen, lower vs. Euro and Pound
• 10-Year Bond Yield: Currently trading higher at 3.00%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +6
  • Dow Jones Industrial Average: +51
  • NASDAQ Composite: +8.90  

Wall Street Research Summary

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