Daily State of the Markets
Wednesday Morning – April 11, 2012

Good Morning. Although I utilize models and disciplined systems coupled with trading rules in my approach to managing the market, I do think it helps to understand what is happening in the market and why – if for no other reason than it helps you implement your signals at times. In fact, I believe that oftentimes the “why” is much more important than the “what” when it comes to staying in tune with Ms. Market’s moods.

The current pullback happening in the stock market is a perfect example. After nearly four months of straight-up movement, it appears that the bears have finally decided to get back in the game. After four months of each and every dip being bought as fund managers scrambled to get a leg up in the performance chase, it looks like the sellers are now in charge. And after four months of nary a pullback worth mentioning, it does appear that this time it really is different.

It’s been five months since the last time the S&P 500 fell for five consecutive days. Yep, you have to go back to mid-November when market players were still stressing over the potential for Greece to default to find something similar to what we’re seeing now. During that particular rout, the S&P lost nearly 8% over seven days. So, our furry friends are suggesting that with the S&P now down -4.26% since the latest high seen on 4/2, the pullback could go a bit further. Different indeed.

Unlike all the modest little momentum lapses the bulls have encountered since Thanksgiving, this time it appears that the thesis from which the rally has been derived is under attack. Suddenly there is concern about the BTE (better than expected) concept as it relates to the economy. Suddenly, the words “global macro” are back in play. Suddenly, rising rates in Europe are back. And suddenly traders are concerned about the state of the earnings season (Capital IQ reported yesterday that Q1 earnings might be just a shade over 1% last year’s totals).

What hasn’t changed however is that over the past year or so, the market has tended to move in a straight line (until it reverses, of course). Gone is the idea of two steps forward and one step back (in either direction). No, today the market tends to move like it has blinders on and right now that direction is down. So, until traders can find a reason to “go the other way” (Alcoa’s earnings perhaps?) or the pullback reaches the magical level of -5% to -7% we just might be stuck with this corrective phase.

What is also different this time around is that the decline hasn’t had a singular focus or catalyst. Sure, there are lots of excuses being given for the pullback, but there isn’t that focal point that has been present in previous declines. As such, the bear camp will argue that this market is cracking under its own weight and that stocks had simply gone too far too fast.

From the relative safety of the sidelines, it is easy to see that this market was overdue for a pullback and that so far at least; the corrective phase has been rather orderly. It is also worth remembering that traders on Wall Street tend to overdo everything in both directions. So, after one of the best starts to a year in quite some time, it won’t surprise me much if traders get a little overzealous with their selling. And then once the selling has subsided, we’d expect to see the indices seek an equilibrium point before embarking on the next leg of this particular journey.

Also falling into the “this time it’s different” category is the fact that I’m just not willing to commit to the direction of journey’s next leg, which, again, is a bit different than what we’ve grown accustomed to this year.

Turning to this morning… It looks like the bulls will try to make a comeback this morning as comments from the ECB and a strong earnings report from Alcoa has the futures pointing to a triple-digit gain.

On the Economic front… We’ll get a report on Import/Export prices this morning and then the Fed’s Beige Book at 2:00pm eastern.

Thought for the day… Be sure to take time to breathe today…

Pre-Game Indicators

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

  • Major Foreign Markets:
    • Australia: +1.06%
    • Shanghai: +0.13%
    • Hong Kong: -1.06%
    • Japan: -0.83%
    • France: +1.46%
    • Germany: +1.31%
    • Italy: +2.46%
    • Spain: +1.58%
    • London: +0.71%
  • Crude Oil Futures: +$0.31 to $101.33
  • Gold: -$1.30 to $1659.40
  • Dollar: lower against the yen, euro and pound
  • 10-Year Bond Yield: Currently trading at 1.988%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +12.41
    • Dow Jones Industrial Average: +98
    • NASDAQ Composite: +22.53

Positions in stocks mentioned: none

For more of Mr. Moenning’s thoughts and research, visit StateoftheMarkets.com

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