Which Way Is The Wind Blowing?

Daily State of the Markets 
Friday Morning – December 10, 2010  

Most every runner will confirm that there are days (usually in the dead of winter or during a rainstorm) when the wind seems to be blowing directly in your face during the entire run; this despite the fact that your route traces out a rectangle! Thus, the question most often asked (or in this case muttered angrily under your breath) in this instance is, “Which way is the wind blowing, anyway?”

Although my best running days are long past and most of my exercise now occurs on skis or on walks with the dogs, this week’s stock market reminded me of this strange phenomenon. You see, one minute, I’m told by an all-knowing guest on the television show that the political hot potato of the day (i.e. is the bill extending the Bush-era tax cuts) is a tailwind for stocks because it removes the potential of a tax hike on any American next year and puts some cold, hard cash into the pockets of ALL Americans via the reduction of payroll withholding taxes.

Yet, within an hour, I’m informed by an equally omniscient commentator (by the way, are ANY of these guys EVER wrong about ANYTHING?) that the headwinds facing the markets on Thursday came from, yep, you guessed it; the new tax bill.

Okay, to be fair, the headwind being referred to here was the talk that House Democrats were busy stomping their feet behind closed doors about the very idea that all Americans might be allowed to share in their latest stimulus effort. Forget the fact that the President and his temporary economic sidekick Larry Summers have publically warned that if this bill is not passed, taxes would go up on everybody, which, in turn, would likely send the economy back into recession. No, this group of politicians was talking about blocking the bill, which, while you may admire their pluck, apparently has a snowball’s chance in heck of happening.

Getting back to the matter at hand, the takeaway from the crosswinds that appear to be blowing in the market is that stocks act like they want to go higher. However, the fear that we might get a replay of the political gamesmanship seen earlier in the year is keeping things in check. Well, that and the concern about what higher interest rates might do to the economy, the sovereign debt mess in Europe, the fun-and-games in the Korea’s, and the rate policies in China, India, etc.

With the worries acknowledged, the amateur chartist in me has to say that I continue to be impressed with the action. Sure a pullback could occur at any time. And frankly, a little consolidation right about now might set things up nicely for a potential run for the roses into the New Year. But from where I sit, the bottom line is the charts of the NASDAQ, Russell 2000, and Micaps do look mighty good. Which leaves me to once again ask, which way is the wind blowing?

Turning to this morning… Despite another hike in China’s reserve requirement, things are fairly stable in the pre-market with futures pointing modestly higher once again. However, we should note that the “fade trade” has been very apparent over the last few days as traders have been simply “going the other way” within minutes of the opening.

On the economic front… The government reported that Import Prices for the month of November rose by +1.3%, which was higher than the consensus for an increase of +0.8%. Export prices rose by +1.5%, above expectations for +0.6%, and above last month’s unrevised +0.8%.

Next up, the U.S. Trade Deficit fell in October to $38.7 billion, which was below the consensus estimate for a deficit of $42.9 billion.

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

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: +0.05%
  • Shanghai: +1.07%
  • Hong Kong: -0.04%
  • Japan: -0.72%
  • France: +0.18%
  • Germany: +0.64%
  • London: +0.08%

   

• Crude Oil Futures: + $0.23 to $88.60
• Gold: – $6.20 to $1386.60
• Dollar: higher against the Yen, lower vs. Euro and Pound
• 10-Year Bond Yield: Currently trading higher at 3.252

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +3.70
  • Dow Jones Industrial Average: +19
  • NASDAQ Composite: +5.50

Wall Street Research Summary

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