Sticking To The Script?

Daily State of the Markets 
Wednesday Morning – January 12, 2011  

Assuming you don’t spend your days focusing all of your energy and attention on the NASDAQ or the NASDAQ 100 Indices (both of which hit another new high for this bull market cycle on Tuesday), you will probably agree that stocks haven’t done much since the opening minutes of 2011. One glance at the chart of the S&P 500 shows that the market has effectively been moving sideways for the past six trading sessions. While this may be disconcerting to some, we do have to remember that so far at least, the market is sticking to the traditional January script.

In case you missed our prior reference, the historical pattern for January goes something like this… Since 1990, stocks have tended to hit the high for the month on the second trading day of the year. From there the market has usually moved modestly lower for the next three weeks (hitting the low for the month on the sixteenth trading day). And then, after a drop of less than 2%, the market returns to rally mode as the first page of the calendar is tossed aside.

So far this year, it looks like traders are indeed sticking to the script. But instead of the high being made on the second day, it was actually hit on the third trading session this time around. And since then, with the exception of the NASDAQ, the indices have been waffling modestly lower. So, if January stays on its historical course, look for the low for the month to occur on the 26th and then for a rally to commence.

While most everyone in the game is almost uniformly bullish on stocks for 2011, Tuesday saw a return of volatility as a couple of decent-sized sell programs appear to have hit the tape just after the Treasury had completed its 3-year bond auction. While the major news outlets blamed disappointment over retail sales numbers (which were released well before that time), we heard that it was a very large S&P futures trade that caused the Dow to dive 45 points in about 8 minutes.

Prior to the fun and games with computers, stocks had been higher on the back of news that Japan will follow in China’s footsteps and lend a hand to the Eurozone by buying bonds. This, when coupled with word that the T-Bill auction in Greece had gone well, managed to put the worries about the PIGI’S and the potential for debt contagion on the back burner. Although there was some excitement mid-day, all’s well that ends well as a second round of program selling brought the dip-buyers back to the game and the indices managed to hang on to some green numbers into the close.

From a chart perspective, it is a positive that the NASDAQ moved on up to new cycle-highs yesterday and that the Midcaps are within spitting distance of new-high ground. However, the rest of the charts would appear to have some resistance overhead. So, with big bond auctions still to come across the pond, it is a decent bet that the traders might just go into wait-and-see mode for a while. And of course, this means that the remainder of the January script could easily play out.

Turning to this morning… The key development this morning was the ECB’s covert participation in the Portugese bond auction. With traders concerned that a lack of participation would send yields soaring and the fear that such an event could spread like wildfire throughout the European bond market, the action by the ECB allayed those fears and actually pushed yields lower. Remember, “Don’t fight the Fed” (especially when they are on a mission). So, with a problem SO widely known, it is little surprise that ECB officials were able to craft a solution.

On the Economic front… The government reported that Import Prices for the month of December rose by +1.1%, which was below the consensus for an increase of +1.2%. The November reading was revised higher to 1.5% from 1.3%. And Export prices rose by +0.7%, below last month’s unrevised +1.5%.

Thought for the day: Consider raising your expectations. As Michelangelo said, the danger is not that your hopes are too high, but rather…

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: +0.35%
  • Shanghai: +0.56%
  • Hong Kong: +1.54%
  • Japan: +0.02%
  • France: +1.38%
  • Germany: +1.31%
  • London: +0.41%

   

• Crude Oil Futures: + $0.10 to $91.21
• Gold: – $4.00 to $1380.30
• Dollar: lower against the Yen and Euro, higher vs Pound
• 10-Year Bond Yield: Currently trading at 3.404%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +8.32
  • Dow Jones Industrial Average: +65
  • NASDAQ Composite: +12.8

Wall Street Research Summary

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