The Waiting Game

Daily State of the Markets 
Friday Morning – October 29, 2010  

In case all of the up-down, down-up, and then back down (or up) action hasn’t tipped you off already, we’re going to suggest that traders are now engaged in a rousing rendition of the waiting game. But instead of simply biding their time, twiddling their thumbs, or sitting on their hands, our friends with the fast computers have busied themselves with trying to profit in whatever way they can with whatever move they can. As such, the favorite game-within-the-game appears to be the “fade trade.”

The idea here is to fade (i.e. go the opposite way) the market’s opening move. As has been the case over the last week, stocks headed one way out of the gate for a few minutes Thursday and then quickly reversed course. And in the current edition of the game, traders don’t even seem to need a reason to go the other way. Nope, the game is to simply wait 5 minutes or so and then fade the move.

The bears will argue that the market’s rather robust bout of fits and starts indicates that the uptrend which has been in effect since the end of August is looking tired and overdue for a rest. Our furry friends suggest that the overhead resistance at the Dow’s April high has proved to be formidable and that the bulls just don’t have the firepower to break on through this time around.

But as one might expect during a sideways phase in the market, the gang on the other side of the aisle has a completely different view. The bull camp argues that the up-down, down-up action is merely a “rolling correction” and is part of a healthy consolidation phase. Our heroes in horns point out that their counterparts have had ample opportunity to get a selling party started but as of yet, have failed miserably.

However, the third side of this argument is that traders are simply waiting on the data. We’ve got Q3 GDP due out this morning and then next week is chock full of inputs as the mid-term elections are Tuesday, Bernanke & Co’s QE II is on tap on Wednesday, and then on Friday we get the Big Kahuna of economic data; the jobs report.

So, where do we stand on this Mexican standoff? Frankly, we try not to take sides in such discussions. Instead our job is to identify the drivers of the market on a daily basis. As such, we’re going to opine that it’s all about the waiting right now as the market tries to find the appropriate equilibrium point in front of Wednesday’s big events.

Turning to this morning… the foreign markets are currently a drag on the futures here at home as traders may be getting cold feet about how much they are willing to bet on QE II.

On the economic front… The government’s advance report on the nation’s second quarter GDP (which really only includes the first two months of data) shows the economy grew at an annualized rate of just 2.0% in the quarter, which is above the consensus expectations for a growth rate of 1.9%. (Recall that the final Q2 rate was +1.7%). Looking at the all-important consumer activity, the Personal Consumption component of the report came above expectations with a gain of 2.6% vs. 1.9%.

Finally, best of luck on this Friday and be sure to enjoy the weekend!

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: -0.41%
  • Shanghai: -0.46%
  • Hong Kong: -0.49%
  • Japan: -1.75%
  • France: -0.33%
  • Germany: -0.15%
  • London: -0.31%

   

• Crude Oil Futures: – $0.46 to $81.72
• Gold: + $6.40 to $1348.90
• Dollar: higher against the Yen and Euro, lower against Pound
• 10-Year Bond Yield: Currently trading at 2.663%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -4.48
  • Dow Jones Industrial Average: -34
  • NASDAQ Composite: -8.35  

* Report includes items that make comparisons to the consensus estimate questionable

Wall Street Research Summary

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