What Was I Thinking?

Daily State of the Markets 
Monday Morning – April 26, 2010  

Last week, I wrote that we felt the market was looking a bit tired and that since the bears had been unable to do anything with their opportunities lately, a period of consolidation was likely in order. We talked about the Dow 11,000 area as being an important line in the sand that, if violated, would surely bring in additional selling. But after playing tag with the line on Monday and giving it a casual glance on Thursday, the market once again broke on through to the other side on Friday to new cycle-highs. Leaving me to wonder what the heck I was thinking.

To be sure, the current joyride to the upside has been most impressive. In short, anyone even thinking about fading this move has been beaten into submission by a relentless bull attack. And as Friday’s action showed, good news continues to be rewarded while bad news, well, actually, there just doesn’t seem to be such a thing anymore.

The initial catalyst to trading on Friday was the fact that Greece had finally asked the EU/IMF for assistance. Although Greece didn’t want to ask and the EU didn’t really want to help, investors in Greek debt have become more and more concerned about the return of their money in recent weeks. This has resulted in a dramatic increase in borrowing costs, which certainly doesn’t help the nation’s financial difficulties. Thus, with a fair amount of debt needing to be refinanced by May 19th, Prime Minister Papandreou decided it was time to activate the aid package offered up by the EU/IMF.

Although there are a great many details that still need to be hammered out, the fact that Greece decided to take the steps necessary to avoid default allowed traders to breathe a sigh of relief.

However, it was actually the report on New Home Sales that really put the bulls back in business on Friday morning. The Commerce Department reported that sales of new homes jumped by 27% in March, which represents the biggest increase in nearly 50 years.

So, those investors focusing on the big picture are currently seeing an improving economy, an uptick in the labor market, strong earnings (at least relative to last year), and now, some enthusiasm toward the housing market. Thus, it is getting harder to find a reason to maintain a negative stance at the present time. All of which, looks to be leading us to a capitulation phase. The bottom line is the short side is the wrong side and cash is indeed trash these days. Thus, money managers appear to be throwing in the towel and putting any and all available cash to work in the market.

While this story can continue to work for some time, we have seen this type of move before and it usually doesn’t end well. When everyone becomes convinced that the game is a one-way street, something inevitably comes out of the woodwork to put the bears back in business. But at this stage, what that something might be remains a bit of a mystery.

Therefore, for now at least, it is probably best to stay “long and strong” and simply enjoy the ride.

Turning to this morning… We don’t have any economic data to review before the bell and the Dallas Fed Manufacturing report is the only release on the calendar today at 10:30 eastern.

On the news front, Bloomberg is reporting that China will announce additional stimulus measures this summer and Germany has said it will make a statement on Greece later on.

Running through the rest of the pre-game indicators, with the exception of Australia and Shanghai, the major overseas markets are higher across the board. Crude futures are up $0.13 to $85.25. On the interest rate front, the yield on the 10-yr is currently trading at 3.80%. Next, gold is up $1.40 to $1155.10 and the dollar is lower against the Yen and the Pound, but higher against the Euro. Finally, with about an hour before the bell, stock futures in the U.S. are pointing to a slightly higher open. The Dow futures are currently ahead by about 15 points; the S&P’s are up by about a point, while the NASDAQ looks to be about even with fair value at the moment.

Finally, remember to think positive today…

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

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