Time To Panic?

Daily State of the Markets 
Thursday Morning – April 15, 2010  

Stocks melted up again yesterday with all the major indices (Dow, S&P 500, NASDAQ, Russell, and Midcaps) blasting to new cycle-highs on gains of 1% – 2.2%. The reason for the sudden renewal of the rally appears to be an out-and-out panic by fund managers trying to get money off of the sidelines and into stocks.

While the news flow was upbeat across the board yesterday, the real story of the market at the present time has to do with the idea that there is no longer any reason for fund managers to be in cash. Sure, the rally is becoming extended. Yes, valuations are getting stretched. It is true that the market is quickly approaching pre-Lehman levels. And we will agree that the sentiment has become rather lopsided. But the bottom line is that there are no signs of a double-dip; the consumer is returning to the malls; earnings appear to be coming in even better than expected; and the Fed is committed to ensuring that the economy gets rolling before taking off the training wheels.

Yesterday’s data reinforced all of the above. We saw better-than-expected earnings from some big names such as Intel (INTC), JPMorgan Chase (JPM), and CSX (CSX). In addition to the strong numbers put up by these companies on both the top and bottom lines, the commentary on the outlook was also very upbeat and suggested that things are returning to normal. For example, JPMorgan’s CEO Jamie Dimon said “there have been clear and broad-based improvements in underlying trends.”

We also got confirmation yesterday that the consumer has come out of their foxhole and is returning to the malls. Retail Sales results for the month of March improved by +1.6%, which was above the consensus expectations for an increase of +1.2% and last month’s revised total of +0.5%. While one month does not a trend make, the data does confirm some of the huge moves seen in consumer-related stocks recently.

While the economy does appear to be turning the corner, the market also cheered the idea that the Fed isn’t going to slam on the brakes any time soon. Although there has been speculation that the FOMC may change the wording of its monetary policy statement, Fed Chairman Bernanke told the Joint Economic Committee yesterday that rates would stay low for an ‘extended period.’ Bernanke also said that the recovery faces “significant restraints,” which supports the idea of keeping rates low while the economy regains its footing.

From a chart standpoint, there is very little to complain about. We had opined recently that the momentum of the market appeared to be waning. But after yesterday’s blast higher, it looks like the bulls have been rejuvenated. And while we have no doubt whatsoever that something will come along to interrupt the upside fun, there is little doubt that this is one of those rare occasions where the best strategy is to get in line with the trend and enjoy the ride (with one eye on the exits, of course).

Turning to this morning… After strong economic numbers, rumors of a rate hike in China is keeping the enthusiasm for the market in check so far.

Closer to home, the Labor Department reported that initial claims for unemployment insurance for the week ending April 10th rose by 24,000 to 484K, which was above the expectations for a reading of 440K. Last week’s total was unrevised at 460K. Continuing Claims for unemployment for the week ending April 3rd were above consensus at 4.639M vs. expectations for 4.58M.

Also on the economic front, the Empire Manufacturing Index (designed to indicate the state of the manufacturing sector in the New York region) for April was reported at 31.86, which was well above consensus expectations for a reading of 24.0.

Running through the rest of the pre-game indicators, the major overseas markets are fractionally mixed. Crude futures are off $0.05 to $85.79. On the interest rate front, the yield on the 10-yr is currently trading at 3.87%. Next, gold is down $6.50 to $1153.10 and the dollar is higher against the Yen, Euro, and Pound. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a slightly lower open. The Dow futures are currently off by about 20 points; the S&P’s are down about 2 points, while the NASDAQ looks to be about 3 points below fair value at the moment.

Wall Street Research Summary

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