Will The Computers Taketh Away?

Daily State of the Markets 
Thursday Morning – June 3, 2010  

The only problem with a day like Wednesday is everyone knows that while the computers giveth, they can also taketh away. So, after three weeks of intense volatility, during which time the market has had very little memory of what occurred from one day to the next, investors cannot be blamed for perhaps being a little skeptical about the potential for some follow-through buying today.

In case you’ve been out on the golf course or working in the garden a lot recently, the market has been on a bit of a roller coaster ride over the past week or so. While yesterday’s pop of 225 points was certainly enjoyable, the upside surprise simply retraced the dance to the downside seen over the prior two sessions, which themselves, had retraced the nearly 300 point gain seen the day before that. And if your head starts to hurt just thinking about all the fun we’ve had in the market recently, you’re not alone.

Although we have recently opined that the volatility is simply part of the basing process, knowing this fact doesn’t make trying to navigate the rapidly moving market any easier. It would also be easy to simply write off the violent swings as a result of all the boys and their high frequency trading toys. But unfortunately, it is part of the hand we’ve been dealt right now and as the saying goes, you’ve got to play the hand you’ve got, not the one you want.

To be fair, there were a fair amount of positive inputs during yesterday’s session. And while we are of the mind that things like Warren Buffett saying the economy is picking up steam and that Europe has yet to have any impact on the U.S., might have simply led to short-covering or some program buying, we do have to recognize that everything in this market isn’t bad.

In addition to the Oracle of Omaha’s comments on the economy and testimony that the gang currently running Moody’s (MCO) shouldn’t be fired en masse, we also got word that May’s sales numbers at both Ford (F) and GM were well above consensus expectations. Oh and don’t forget about the good news on the housing front as the National Association of Realtors informed us that pending home sales were even higher than anyone thought. Now toss in the dead-cat bounce in energy and some betting that Friday’s jobs report may be better than the whisper numbers, and you’ve got a recipe for a meltup.

However, just in case the rumor that the jobs numbers were leaked before the close wasn’t completely accurate, we should take note of the fact that the major indices are now facing some serious overhead resistance. And with the 200-day moving average also sitting just above the highs of last Thursday and Friday, the bulls may have their work cut out for them if they have plans to break on through to the other side in the near future.

Turning to this morning… Stock futures are pointing to a modestly upbeat open on the back of strong gains in overseas markets and a host of economic data pointing to economic improvement in the US. However, same-store sales from the nation’s retailers have been coming in a little light and are something to watch.

On the economic front… we’ve got several economic reports to sift through so let’s get to it. First, ADP reported that the private sector job market expanded for the fourth straight month in May as job growth was 55,000 jobs last month, which was below the consensus expectations for a gain of 70,000. Next up, the government reported Nonfarm Productivity in the first quarter increased by +2.8%, which was below the consensus for +3.6% and Q4’s revised increase of +6.6% On the inflation front, Unit Labor Costs were reported to have fallen -1.3% versus the Q4’s revised reading of -5.6% and Q3’s drop of -4.4%. And finally, the Labor Department reported that initial claims for unemployment insurance for the week ending May 29 fell by 10,000 to 453K. The week’s total was a bit below the Reuters consensus for a reading of 455K. Continuing Claims for unemployment for the week ending May 22 were a smidge above consensus at 4.666M vs. expectations for 4.610M. For comparison purposes, last week’s revised total was 4.635M (from 4.607M).

Finally, consider embracing an “attitude of gratitude” all day today…

Pre-Game Indicators

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

• Australia: +2.33%
• Shanghai: -0.73%
• Hong Kong: +1.62%
• Japan: +3.24%
• France: +2.24%
• Germany: +1.81%
• London: +1.72%