Resolution?

Daily State of the Markets 
Friday Morning – February 4, 2011

One of the toughest things to do in this business is to try and identify what is causing the market to do whatever it is that it happens to be doing at the moment. Whether you are attempting to do this on an hourly basis, day-by-day, or from a macro point of view, it is often difficult to take your emotions and perhaps, more importantly, your opinions out of the mix long enough to see the forest for the trees.

Sometimes, the catalyst for a move is easy to spot; such as when stocks roar up or down in response to an economic report or news headline. Then there are other times when you really have to dig deep to figure out what the heck is going on. But after writing about the daily machinations in the stock market for more than a decade, I can say that if you are looking for answers in the popular press, you may be discouraged with regularity as the explanations offered up oftentimes don’t pass muster.

I don’t mean to speak negatively about the press. It’s just that I hold myself to a higher standard when it comes to achieving a level of understanding about the markets’ movements.

So, here’s a tip, when doing your detective work, it helps to be able to watch the market movements on a very short-term basis (one-half of one of my screens is dedicated to a 1-minute chart of the S&P 500) with one eye and the news flow with the other. This nose-to-the-grindstone approach may not be a realistic option for most investors, but it definitely paid off on Thursday.

While the popular press credited either Ben Bernanke or the economic news for the day’s modest gain, it was more likely the hint of resolution in Egypt that turned the screens from red to green at about 3:00 pm eastern time. If you have the opportunity to check out a short-term chart of the market from Thursday, you will notice that just after 3:00 pm, the indices spiked higher. And while it easily could have been a coincidence, this is also the time that AP started reporting that Hosni Mubarak had started talking about wanting to leave power. The story went on to explain why Mubarak couldn’t actually step down at the moment, which didn’t exactly sound like a positive. However, what the market heard was the idea that a resolution was close at hand.

Speaking of resolutions, I mentioned on Wednesday that some of the market’s big-picture problems appear to be on their way to being solved. Yesterday we appear to have gotten more support for this concept.

First, while traders were a bit concerned about Thursday morning’s bond auction in Spain, it actually went off without a hitch. Later in the morning, ECB President Trichet sounded almost upbeat in his comments about the Eurozone’s economy. Thus, while there are still lots of opportunities for bad things to happen across the pond, it is beginning to feel like the European debt crisis may be on its way to being resolved.

Closer to home, Ben Bernanke helped resolve the issue of the economy’s health by saying that there is increasing evidence of a self-sustaining recovery in consumer and business spending taking hold. And if you don’t believe Mr. Bernanke or Mr. Trichet, take a glance at this week’s ISM and PMI reports, or corporate earnings, or the same-store sales numbers. These reports will all confirm that the U.S. economy’s ills are also well on their way to being resolved.

And in the stock market, the resolution of issues usually leads to one thing – higher prices. So, while stocks can certainly pull back at any time (and for just about any reason), we’d suggest continuing to give the bulls the benefit of the doubt for a while longer.

Turning to this morning… Although the foreign markets are higher overnight all eyes are on the jobs report, so let’s get to it…

On the Economic front… The Labor Department reported that Nonfarm Payrolls, which is arguably the most important gauge of the state of the economy at the present time, rose in the month of January by just 36,000. This was well below the consensus estimates for an increase of 142,000. The private sector (aka the household survey) showed gains of 50K jobs, which again was also well below the estimates. However the November/December reports were revised higher by a cumulative total of +121K jobs.

The big shocker in the report is the nation’s Unemployment Rate dove to 9.0%, which was well below the expectations for a reading of 9.5% and December’s level of 9.4%.

This report is a head-scratcher for sure as the data appears to be contradictory. However, based on most other surveys, the jobs picture does seem to be improving in the U.S. It is just a question of when that improvement will actually show up in the BLS numbers.

Thought for the day: Best of luck on this Friday and be sure to enjoy the weekend!

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell…

• Major Foreign Markets:
  • Australia: +0.80%
  • Shanghai: NA
  • Hong Kong: NA
  • Japan: +1.08%
  • France: +0.41%
  • Germany: +0.32%
  • London: +0.38%

   

• Crude Oil Futures: +$0.61 to $91.15
• Gold: -$4.50 to $1348.50
• Dollar: lower against the Yen, higher vs. Pound and Euro
• 10-Year Bond Yield: Currently trading at 3.589%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +1.80
  • Dow Jones Industrial Average: +15
  • NASDAQ Composite: +5.00

Wall Street Research Summary

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