The Whispering Returns

Daily State of the Markets
Friday Morning – April 27, 2012

Good Morning. As you may know, my Daily State of the Markets report is dedicated to identifying the drivers of the market action. The vast majority of the time, this is a fairly easy task as the reasons behind a move are usually pretty straightforward (well, eventually anyway). But then there are days like Thursday. You see there are times when it isn’t so much about what happens in the stock market game, but rather how it happens that matters.

For example, the “what” of yesterday’s market was pretty simple. Stocks broke out of the little trading range that had developed over the past two weeks, leading many to believe that the corrective phase was over and the bulls were back. However, once the “how” is understood, I won’t blame you if you wind up being a little less enthused.

As the saying goes, it’s not the news, but how the market reacts to the news that matters. So, yesterday when the S&P suddenly started spiking, I naturally assumed there was some news that had triggered what appeared to be pretty intense buy programs (when the S&P moves a point a minute for several minutes, it is pretty clear that there are computers involved). Stocks had been moving sideways for the better part of 2 hours and the bam, the indices took off. So, I started digging around for the “why.”

I checked my news outlets for headlines and found absolutely nothing. I scanned my emails from colleagues and again there wasn’t anything of interest. I checked my Twitter feed – zip. Then I started looking at the screens, now determined to find the catalyst behind what was turning out to be an impressive pop. It wasn’t the European markets because they were closed. It wasn’t the dollar, the moves didn’t match up. It wasn’t the banks. The semis looked like a possibility for a moment, but again, the timing of the moves weren’t matched up as well as I’d like. And no, it wasn’t Apple (AAPL) or Google (GOOG). I checked FedEx (FDX) and UPS (UPS) for possible big turnarounds as I thought maybe something had come out of a call. Then I looked at “Dr. Copper” (JJC – iPath Copper) and I finally felt like I was finally on to something.

With the JJC moving up in tandem with the market and things like the DBC (PowerShares Commodity Index) the USO (US Oil Fund) and the UUP (PowerShares US Dollar) all just lying there doing nothing, the message was clear – there was something up with the economy. And yet there was not a single news story to support the big move.

I also noted that the S&P’s move through 1393.50 likely triggered a fair amount of short-covering and buy-stops. But again, the move was a bit larger than one might have expected given the modest little resistance zone that was present. And then I finally found it. Well, actually a colleague alerted me to the fact that “word” was making the rounds that this morning’s GDP numbers were going to resurrect the BTE (better than expected) theme that had been all the rage in the first quarter. In short, rumor had it that Q1 GDP was going to come in at or above 3%, which would indeed be BTE.

If this type of whisper number rings a bell it should. If you will recall, it was just a little over a week ago that a similar type of whisper started making the rounds that China’s GDP was going to surprise to the upside. And just like yesterday, stocks had blasted higher on that expectation. However, stocks then spent the next four days declining when that particular whisper turned out to be patently false.

So, will the same thing happen today? The whispers say the economy should be celebrated. We shall see… However, if the whisper numbers turn out to be false and stocks start to sink, at least you will now understand why.

Turning to this morning… Although rates continue to rise in Italy and S&P downgraded Spain’s credit rating by two notches, S&P futures are currently pointing to a modestly higher to flat open as this morning’s GDP report would appear to put the possibility of additional Fed assistance at some point this year back on the table.

On the Economic front… The government’s advance report on the nation’s GDP during the first quarter of 2012 shows the economy grew at a rate of +2.2% during the January-March period. This was below the estimates for a growth rate of +2.6% and below the fourth quarter’s rate of 3.0%. On the inflation front, the Price Deflator came in at +2.9% which was above the expectations for +2.1% and the Employment Cost Index came in at +0.4%, below expectations for a reading of +0.5%. On the consumption side, the index was up +2.9%, which was above expectations.

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