Will It Stick?

Daily State of the Markets 
Friday Morning – June 11, 2010  

Perhaps the third time will indeed be the charm. Everybody knows that after a significant decline, stocks tend to experience a rebound. And it is during this rebound that Ms. Markets tends to tip her hand. If the buying is strong, the bears have a tendency to stand aside and let their counterparts do their thing for a while before reasserting themselves. However, if the bounce is weak, our friends in fur tend to become emboldened and impatient.

However, up until this point, the bulls have been rebuffed each time they have tried to get something going to the upside. Despite an extreme oversold condition and the negative sentiment having become so thick you could cut it with a knife, the bulls have failed miserably during their prior two attempts to put in a low and rally off of the bottom. Thus, the key question to ask after yesterday’s impressive 3% run for the roses is, will it stick?

For a change, the bulls had a few things to hang their hats on yesterday as it appeared that the global recovery trade appeared to make a bit of a comeback. And while there were some stories to support the recovery theme, the fact that traders didn’t have to deal with any bad news out of Europe or China probably had as much to do with the gains as anything else.

The bulls got their engines started on the back of a report that Chinese exports were up 48.5% from year ago levels. While the number was largely in line with the numbers that had been leaked on Wednesday, the confirmation of a strong rebound in exports seemed to put a lid on the idea that Europe’s debt mess has impacted the Chinese economy.

Speaking of Europe, it was also positive that Dai Xianglong, who is the chairman of China’s National Social Security Fund, said that the euro will be strong enough to weather the European sovereign debt crisis. And while this remains to be seen, it has been a while since anybody had anything positive to say about the future of the euro or the EU.

In addition, traders were encouraged by the fact that there were no surprises out of the ECB meeting. Although some expressed concern about the lack of any new facilities to help fight the crisis, the fact that the ECB did not appear to be in panic mode may have also helped calmed fears about the future of the EU.

Finally, stocks enjoyed a nice bounce once it was reported that Span’s 3-year bond auction had been met with strong demand. So, for one day at least, the talk of the EU breaking apart and the euro crumbling seemed to take a back seat to optimism.

On a chart basis, yesterday’s blast of 273 points was accompanied by a couple good points. First, and foremost, the fact that the indices have rallied when they did helps support the argument for a double-bottom from a near-term perspective. In addition, the movement above the various short-term moving averages is certainly a good sign.

However, it is important to keep in mind that there is resistance overhead, which may make the sledding a little tougher from here. So, since we’re calling this a basing pattern, we will be watching the breakout areas closely in the coming days.

Turning to this morning… The Commerce Department reported that Retail Sales fell in the month of May by -1.2%. This was well below the consensus for an increase of +0.2%. When you strip out the sales of autos, sales were down by -1.1%, which was also below the consensus for an increase of +0.1%. And when you take out autos and gasoline, sales declined by -0.8%, which was below the +0.2% consensus and below April’s revised reading of +0.6%

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

Pre-Game Indicators

Here are the important indicators we review each morning before the opening bell…

• Major Foreign Markets:
  • Australia: +1.53%
  • Shanghai: +0.29%
  • Hong Kong: +1.22%
  • Japan: +1.70%
  • France: +0.97%
  • Germany: -0.06%
  • London: +0.60%

   

• Crude Oil Futures: -$0.43 to $75.05
• Gold: +$2.50 to $1224.70
• Dollar: Higher against Yen, Euro, and Pound
• 10-Year Bond Yield: Currently trading lower at 3.27%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -7.54
  • Dow Jones Industrial Average: -60
  • NASDAQ Composite: +16  

Wall Street Research Summary

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