Something New To Worry About?

Daily State of the Markets 
Wednesday Morning – November 24, 2010  

Holiday Publishing Schedule: Due to the semi-holiday, we will not publish a report on Friday morning. Daily State of the Markets reports will return on Monday.

Good morning. On November 5th, stock market investors didn’t have a care in the world. Stocks were at new highs for the bull market cycle, earnings continued to be good, the soft patch appeared to be giving way to better economic data, QE II was going to save the day, the democrats had been run out of town, the seasonal pattern favored the bulls, and traders could be heard espousing two very old Wall Street clichés: “Don’t fight the Fed” (especially when they are on a mission) and “Don’t fight the tape.” Sure everybody knew that the market was overbought and due for a pullback, but with everything going the bulls’ way, even a 2% decline seemed out of the question.

But since that day, things have changed as there now appears to be something new to worry about on a daily basis and all the news seems to be bad news.

First it was Ireland who after suggesting that they didn’t need a bailout, turned around less than 72 hours later and announced a deal with the EU/IMF. Then it was China as traders began to fret that the government would overdo it in its efforts to cool off some areas of the economy that are bubbling up. Next it was the attacks on Bernanke’s QE II plan, which, like the voting in Chicago, were coming in early and often. Then Portugal started talking openly about needing access to the EU/IMF kitty (only to deny any need for a bailout the next day). Then, just about the time a logical trader might have thought the pullback had run its course, we were treated to scenes of FBI agents raiding hedge fund offices and mutual fund familes. Oh, and then to start things off this morning, we got word that North Korea was taking target practice at its neighbor.

As if this plethora of negative inputs weren’t enough, we also have “the trade” to deal with. If you will recall, the declining dollar was a big part of the QE II trade that was all the rage from September 1st through November 5th. The thinking was that the Fed’s buying of bonds would wind up trashing the greenback. Thus, traders helped matters along by selling the dollar and buying those “risk assets” that tend to benefit from a falling U.S. dollar such as commodities, stocks, and emerging markets.

However, as is the case with just about everything in life, all good things must come to an end. So, with sovereign debt worries and geopolitical concerns suddenly cropping up, there has been a bit of a “flight to quality” trade lately. And what does the fast money crowd do when the dollar rises? Yep, you guessed it – sell risk assets such as stocks, commodities and emerging markets.

Although the day turned out to be fairly ugly on Tuesday, the bulls could be heard mumbling something along the lines of “it could’ve been worse.” After all, with something new to worry about on a daily basis, the fact that the S&P has only fallen 3.7% from the November 5th high has to be considered a moral victory.

Speaking of moral victories, the important support zone on the charts also held up under Korean fire yesterday. And while HFT programs don’t really care about support and resistance levels, the bulls suggest that it is modestly encouraging that their opponents were not able to break on through to the other side on Tuesday.

Turning to this morning… the fears of yesterday seem to be abating a bit on this day before Thanksgiving as stock futures are moving higher in the early going.

On the economic front… we have a host of data to get through before the bell and more later this morning.

First, and most importantly, the Labor Department reported that initial claims for unemployment insurance for the week ending November 20 fell by 37,000 to 407K. The week’s total was 20K below the Reuters consensus for a reading of 437K. Continuing Claims for unemployment for the week ending November 13 were below consensus at 4.182M vs. expectations for 4.278M and last week’s revised (higher) 4.324M.

Next up, Orders for long-lasting goods rose in October. The Commerce Department reported that Durable Goods orders fell by -3.3% during the month, which was below the consensus expectations for -0.4%. When you strip out the volatile orders for transportation, orders fell by -2.7%, which was below the consensus for +0.5%. The September reading was revised higher to+1.3% from -0.4.

And lastly, Personal Incomes rose by +0.5% in October, which was above the consensus expectations for an increase of +0.4% and the September level of -0.1%. Personal Spending for the month rose by +0.4%, which below the expectations of +0.5% and the September reading of +0.3%.

Finally, given the date on the calendar be sure to embrace an “attitude of gratitude” today – and enjoy a wonderful Thanksgiving Holiday!

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: -0.08%
  • Hong Kong: +0.56%
  • Japan: -0.84%
  • France: +0.36%
  • Germany: +1.18%
  • London: +0.60%

   

• Crude Oil Futures: + $0.45 to $81.70
• Gold: – $3.20 to $1374.40
• Dollar: lower against the Yen, Euro and Pound
• 10-Year Bond Yield: Currently trading at 2.83%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +7.50
  • Dow Jones Industrial Average: +66
  • NASDAQ Composite: +14  

Wall Street Research Summary

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