Shock and Awe

Daily State of the Markets 
Monday Morning – May 10, 2010  

From February 9th through April 26th, the stock market was a one-way street as the bulls confidently moved prices higher on an almost daily basis. With evidence mounting that the economy was recovering and data showing that even the job market was starting to perk up, investors grew more and more confident that it was okay to continue buying stocks on the way up.

However, the recent encounter with the market’s dark side may have turned this outlook on its head. Thursday’s plunge showed investors the ugly underbelly of the market. Instead of buying each and every dip, there is a decent chance that traders may now be looking to sell the rallies for a while. The bottom line is it is tough to have confidence in a market that can dive 1000 Dow points in a matter of minutes.

Despite a solid payrolls report on Friday, where we learned the economy created more jobs than expected, traders appeared to remain shaken by Thursday’s market gyrations. Even word that the ECB might have a loan facility available shortly and that the Greek aid package had been approved by Germany, Netherlands, Portugal, Spain, and France wasn’t enough to stimulate any buying interest in the U.S. No, the “risk aversion” theme seemed to back in a big way.

The heart of the issue right now is that while the “how” of the big dive has been explained (computer generated trades moved sell orders from the NYSE to electronic exchanges that pulled their bids simultaneously once things got ugly), the question of “why” the hysterics got started remains unanswered. According to weekend reports, officials appear to be backing away from the ‘fat finger’ error explanation of how the whole thing began. Thus, traders still don’t know why the market dove so hard, so fast or if it will happen again today, or tomorrow, or the next day…

Please accept my apology if this sounds a little pessimistic. I am indeed a card-carrying member of the glass-is-at-least-half-full club. However, my primary mission each morning is to identify the driving forces in the market. And the problem is nobody really knows what drove the market into a freefall on Thursday.

Normally, I’d be looking for a rather spirited snapback bounce right about now. After all, the recent declines of -8.74% on the S&P, -7.4% on the Dow, -10.5% on NASDAQ, and -12% on the Russell 2000 certainly satisfies the standard definition of a correction. And given the fundamental backdrop, it would seem that the current haircut should be enough to keep the bears happy. However, with confidence in the markets more than a little shaky at the present time, we will remain a little cautious for the moment.

So, we’ll be watching today’s market action very closely. Frankly, if the big bounce fizzles, we will know that the bears remain large and in charge.

Turning to this morning… It appears we have a new panic on our hands – this time of the buy side – as the EU, IMF, ECB, and U.S. Federal Reserve have come together in an effort to provide a “shock and awe” type of backstop to the European debt crisis. The EU and IMF have put together a loan package worth 750 billion Euros while the ECB has begun buying Euro-zone government bonds and the U.S. Fed has reopened swap lines with foreign central banks.

The moves have sent stock markets in Europe as well as the futures here in the U.S. soaring as traders on the short side panic out and buyers return.

Running through the rest of the pre-game indicators, the overseas markets are higher across the board (to say the least). Crude futures are up $2.63 to $77.74. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.55%. Next, gold is down $15.00 to $1195.40 and the dollar is lower against the Yen, Euro, and the Pound. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to an explosively higher open. The Dow futures are currently ahead by about 355 points; the S&P’s are up about 45 points, while the NASDAQ looks to be about 73 points above fair value at the moment.

Finally, just for tun, try smiling at everyone you meet today…

Wall Street Research Summary

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