Shoulda, Coulda, Woulda?

Daily State of the Markets 
Thursday Morning – September 23, 2010  

One of the most difficult parts of the stock market game is to deal with what IS happening in the market as opposed to what you believe SHOULD be happening. Along these lines, a couple of the key lessons I’ve learned over the years include: (1) Never, ever use the words “should,” “could,” or “would” when referencing trading decisions (i.e. avoid the “shoulda, coulda, woulda” game) and (2) Ms. Market doesn’t give a hoot about what I think.

With that said however, just about everybody in the business recognizes that the stock market has run a long way in September; has broken out above the top end of the recent trading range (well, except for the Russell 2K, that is); is very overbought at the present time; and as such, “should” be vulnerable to a pullback right about now. But this is where the problem comes in. By now, logic dictates that the bears “should” have gotten something going to the downside already. But despite some decent opportunities, our furry friends have so far fumbled the ball.

Don’t get me wrong, I’m happy to see the bulls hold their ground here and for the charts to remain positive on balance. However, it is interesting that just a few short weeks ago the data traders were presented with yesterday might have caused a fair amount of selling. But in this brave new world in which everyone assumes the Fed will keep rates low in perpetuity, traders can apparently look past the current issues to bluer skies ahead.

What about yesterday’s decline in prices, you ask? In short, it “could” have been and perhaps “should” have been a lot worse. With Adobe’s (ADBE) big miss and the resulting flight from technology, the lousing housing numbers, and the ongoing dive in the dollar and bonds, one might have expected to see the bears grab the ball and move up the field a bit more.

On the subject of the bond market, we’re of the mind that this one needs a little explanation. The common conclusion one might come to when looking at the resumption of the rally in the bond market (prices rising/yields falling) is that traders are worried about the economy. But in this case, it’s really more about traders piling on.

With the assumption that the FOMC is about to embark on another round of quantitative easing (the direct purchase of bonds) traders are taking the advice of PIMCO’s Bill Gross and “shaking hands with the government” (buying what the government is buying). So, this time around, it looks like the move down in bond yields may represent more of a momentum trade (remember, hedge funds are suddenly a very big player in the U.S. Gov’t bond market) than worry about the economy.

In any case, it is important to recognize that the stock market has been following the bond market around like a little puppy dog lately. When yields rise, stocks rise and vice versa. While this actually makes little sense if you believe that bonds are currently being bought in anticipation of more buying by the government (and thus “shouldn’t” be happening), it does appear to be the game that is being played right now.

Turning to this morning… Europe is down on renewed sovereign debt worries and the PMI data that was weaker than expectations. This has pushed U.S. futures lower in the early going.

On the economic front… The Labor Department reported that initial claims for unemployment insurance for the week ending September 18 increased by 12,000 to 465K. The week’s total was 16K above the Reuters consensus for a reading of 449K. Continuing Claims for unemployment for the week ending Sept. 11 were above consensus at 4.489M vs. expectations for 4.453M and last week’s revised (higher) 4.537M.

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

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: +0.11%
  • Shanghai: Closed
  • Hong Kong: Closed
  • Japan: Closed
  • France: -1.48%
  • Germany: -0.78%
  • London: -0.88%

   

• Crude Oil Futures: – $0.95 to $73.76
• Gold: + $0.20 to $1292.30
• Dollar: higher against the Yen and Euro, lower vs. Pound
• 10-Year Bond Yield: Currently trading lower at 2.510%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -10.18
  • Dow Jones Industrial Average: -77
  • NASDAQ Composite: -14.44  

Wall Street Research Summary

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