Good Morning. Okay, now it gets interesting. We had the run to new all-time highs in every stock market index save the NASDAQ (which for the record, still needs to gain more than 50% from last week's highs to best its 2000 high water mark) - a run that has been unloved by many and outwardly hated by many more. We had our shocking sell-off, which has been predicted by the bear camp at least seventeen times so far this year. And now we've had our requisite bounce. So, what's next?
Of course the bears will tell us that yesterday's bounce didn't recover enough of the Monday decline to be taken seriously, that the volume was lighter on the rebound than on the decline, that there is significant resistance overhead, and that a break below 1550 is going to open the floodgates for sellers. Oh, and then there's the "spring slowdown" theme that appears to be playing out yet again to contend with. "Good luck with that," I'm told.
On the other side of the aisle, the bulls argue that the important support level at SPX 1550 held, that volume wasn't half bad on the rebound yesterday, that Tuesday's breadth was impressive, that the DJIA is a mere 109 points off its all-time high set just two days ago, and that the majority of Monday's shellacking was tied to margin-call selling courtesy of the out-and-out wipeout in gold.
So, the bottom line fans, is that we appear to have a ballgame on our hands here. I can argue either side of this one. But given where we are on the calendar, I've got to admit that moving to cash and staying put for a couple months is sounding pretty good to me right about now. And I'm guessing that anyone else who has been beaten up during the last three "spring slowdown" seasons will likely agree with me.
But unfortunately, that's not the way I play the game. So, given that I will continue to watch the market and follow our models each and every day this year (regardless of the many and varied locations my calendar calls for in the coming months), I think it is important to identify the drivers of the action and to understand the key questions in the game at any point in time.
So let's get to it, shall we? From my perch, the real key question right now is if growth is slowing enough to cause a meaningful pullback in stock prices. The important word there is "meaningful." Remember, stocks can pull back 2%-3% for any old reason at almost any point in time. Heck, what transpired Friday and Monday may ultimately prove that point nicely. Also remember that it is difficult for most investors to make any hay during a garden variety sloppy period in the market. However, a "meaningful" decline of 5% to 10% is a horse of a completely different color. And at a minimum, the 10% mark has been seen for the last three straight years.
To be sure, the U.S. economic data has consistently come in weaker than expected recently. And then the latest data out of China confirmed that the world's second biggest economy is clearly not hitting on all cylinders at this time. However, I think it is important to recognize that the current weakness hasn't exactly been a surprise. And along those lines, I'll also opine that the stock market is really focused on the growth in the second half of the year. Otherwise, I'd argue that the market wouldn't have run to all-time highs in the face of the raft of weak reports seen in the last month.
Remember, we've been here before - each and every spring to be exact for the past three years. Each year, the market has looked ahead to the economy reaching that elusive "escape speed" only to encounter some sort of crisis both here and across the pond. So, will this time be different or will we simply see yet another replay of the "withering roots" theme?
While I'm just spit-ballin' here, I believe that Monday's dance to the downside had more to do with the crisis in the gold pits than anything new on the global macro landscape. And if the U.S. is about to hit the skids again, why aren't junk bond prices cratering? If you've ever dallied in the junk arena you know that high yield bonds are (a) considered "stocks in drag" and (b) uber sensitive to the economy. So, if the economy is about to stall again, we should expect to see the prices of junk bonds (the JNK is a good proxy to watch) begin to erode in earnest. But so far at least, the JNK is looking pretty darn good.
In addition, if the economy is going to begin flirting with recession yet again, we should hear companies begin to warn about their earnings outlook for the upcoming quarters. And the long and short of it is that if this is the case, I would expect stocks to struggle mightily going forward. As such, I'll be watching the key support and resistance zones with interest in the coming days.
So, near as I can tell, this is the question: Is growth slowing enough to cause a problem or are we just seeing a speed bump in the data? You may want to stick around, because this is about to get interesting.
Turning to This Morning ...
There is a fair amount of weakness in European bourses this morning, which is being tied to data, earnings, uncertainty in Italy, as well as the rumor that Germany's debt may be downgraded in the near-term. Here at home, earnings misses by YHOO and BAC are adding to what now appears to be a fairly dour mood as futures are currently pointing to a nearly triple-digit decline in the Dow at the open.
Here are the Pre-Market indicators we review each morning before the opening bell ...
Major Foreign Markets:
- Shanghai: -0.04%
- Hong Kong: -0.47%
- Japan: +1.22%
- France: -1.54%
- Germany: -1.70%
- Italy: -0.63%
- Spain: -1.28%
- London: -0.68%
Crude Oil Futures: -$1.18 to $87.54
Gold: -$9.90 to $1377.50
Dollar: lower against the yen, higher vs. euro and pound
10-Year Bond Yield: Currently trading at 1.706%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -11.77
- Dow Jones Industrial Average: -97
- NASDAQ Composite: -25.71
Thought For The Day ...
Big shots are little shots that kept shooting. -Chistopher Morley
Positions in stocks mentioned: none