Good morning. To be honest, making sense of the stock market action (which is the primary objective of my oftentimes meandering morning market missive) can be challenging at times. For example, one minute the focus is on the economy and the next it's on the Fed. On the subject of Bernanke's Bunch, one day the worry is that the Fed is going to pull the punch bowl from the QE party and the next, well, the data indicates that QEinfinity is still the name of the game. Oh, and just in case that isn't confusing enough, we're told that all of the above is bad. Ughh.
In case you are not aware, my son Don, who has a degree in economics and is definitely much smarter than I am, has been working with me for more than five years now. On Wednesday afternoon, he pinged me with a somewhat sarcastic comment on the state of the market action. "Let me get this straight," he said. "Stocks are going down on fears that the Fed might be able to start removing their stimulus from the economy. But if the economy is improving - so much so that the Fed needs to take action - doesn't that mean that profits would likely improve as well? And correct me if I'm wrong, but isn't that a good thing?"
Although he knows full well that markets "trend" on the fundamentals of the market but "trade" on prevailing sentiment, my son still has trouble at times separating his economics background from what I loosely term "stock market logic." I explained that a certain segment of the "fast money" crowd believes that the only reason that stocks have been rising is due to the liquidity being continuously pumped into the economy by the Bernanke cavalry. Thus, if the Fed even hints at turning off the spigot, this group of market masters will fall all over themselves to avoid "fighting the Fed."
While he definitely wasn't buying the validity of the explanation, he did understand that sometimes it is "the trade" of the day that matters most. So, if traders were selling on fears that interest rates were going to rise, then that was the reality of the day.
However, yesterday's action caused this discussion to be resurrected. In case you missed it, there were seven economic reports released in the U.S. on Thursday and one pretty big report in Europe. In short, the reports didn't exactly paint a picture of robust economy. The preliminary PMI's in the eurozone were weak. Weekly Jobless claims rose. The Flash PMI was below consensus. Bloomberg's Consumer Comfort rose but there was worry about oil prices. The LEI was light. Existing Home Sales were in line. And the Philadelphia Fed Business Outlook index was an abject disaster.
After the slew of reports, my son sauntered into my office and said, "Let's talk about that Fed pulling the punch bowl thing ... It appears that the general tone of today's reports is negative - especially that Philly Fed number. And doesn't weak economic data mean that the Fed isn't likely to stop the QE injections? So, based on your explanation of yesterday's action, shouldn't stocks be rising on this "bad" news? And since stocks are getting hit again, can the bears really have it both ways?"
I laughed, complimented him for the analysis, shrugged my shoulders and said, "Yes, it appears that the bears can actually play both sides of the fence on this one." I then proceeded to tap dance a bit with my answer. "Sometimes, the reason behind a move just doesn't matter. Traders have been expecting a correction for quite some time now and thus, we are in an environment where any reason can be a good enough reason to sell."
I added that the vast majority of the down move so far had been algo-driven and that while advancements in computing have been impressive over the last few years, computers still don't have the ability to reason. And with algos racing other algos to get on the right side of the move and all the computers following the same trends on a millisecond basis, the reason behind this type of move really doesn't have to make a lot of sense.
My conclusion was that stocks were overbought, sentiment had gotten too optimistic, and that the market was "set up" for a fall. As such, almost any excuse was good enough to start the decline. However, I suggested that the two-day dance to the downside was probably enough for a "just because" type of move and that the market's true focus should become apparent in the next couple of days.
So, if there are indeed strong concerns about the Italian election, the sequester, the economy, the Fed, housing, China, and/or anything else you can think up, those fears will likely dominate the action and the decline will continue. Thus, I'm of the mind that we need to watch the support zone at S&P 1500 very carefully as this area might be a spot where the bulls say "enough is enough." However, if this line in the sand is breached, the bulls might be in for some additional discomfort. My only hope is that the next discussion with my son doesn't start with, "Let me get this straight ..."
Turning to this morning ... The combination of a rally in Japan, a better than expected IFO Business Climate reading in Germany and St. Louis Fed President Bullard telling CNBC that Fed policy will remain easy for a long time has created a rebound in U.S. stock futures. The question, of course, is if it can last.
- Shanghai: -0.51%
- Hong Kong: -0.54%
- Japan: +0.68%
- France: +1.66%
- Germany: +0.88%
- Italy: +1.37%
- Spain: +1.34%
- London: +0.71%
- S&P 500: +8.63
- Dow Jones Industrial Average: +79
- NASDAQ Composite: +15.11
There is no pillow so soft as a clear conscience. -French proverb