Good morning. Anyone who has ever clicked the "buy" button or shouted orders into a phone (yeah, I'm that old) knows that even during the ugliest of bear markets, stocks simply don't go down every day. As such, most traders I know have been looking for a bounce. Sure, a couple were a day (or four) early in their attempt to play a brief countertrend move, but the bottom line is active investors knew that the market was oversold and due for a rebound.
To be clear, a "reflex bounce" doesn't need much in the way of a reason to get started. It just needs to ... well, get started. And then once things begin moving up a bit, the shorts that pressed their bets or were late to the party go running for cover. Then the dip-buyers do their thing. Then the long-only value guys running mutual funds start showing up. And before you can say "What the heck changed?" stocks are off to the races.
But as long-time readers know, I believe that stocks generally need a reason to make a big move. And for lack of a better definition, I'll call a "big move" anything with three digits in it on the venerable DJIA. So what was the reason behind Tuesday's joyride to the upside, you ask? The answer is simple: The data wasn't a disaster. Yep, that's right -- not bad is the new good!
The way I see it, a decline of almost 7% had done enough to discount what I'm calling "the chance for something more than a soft patch." The bottom line is that nobody knows if the economy will deteriorate from here. And the bulls will argue that much of the recent punk data can be attributed to the triple tragedies in Japan. As such, -7% is probably enough of a correction in prices to discount what is known right now.
So when yesterday's plethora of data from around the globe came in without any gasps or shrieks of fear, the bulls quickly went to work on undoing some of the bears' handiwork. In other words, while it is safe to say that none of Tuesday's economic data points were actually positive, the fact that they weren't significantly worse than expected caused those seeing the glass as at least half full to assume that we've seen the worst of this little economic hiccup.
That last sentence may draw some catcalls from the bear camp, as there was absolutely nothing in yesterday's data to suggest that the economy either isn't as bad as had been thought or is actually improving. No, inflation in China came in at a 34-month high. Industrial production in China was down a tenth from April. Retail sales in the U.S. fell 0.2%. The PPI here at home was a tenth higher than consensus (although down a fair amount from April). And business inventories were also light.
But with an oversold market, and just about everybody everywhere having convinced themselves that stocks could go nowhere but down, this is what you get. Does this mean that the correction is over and that the rally will take us back to the April highs? To be sure, I don't know (did you really expect a different answer there?). But instead of wasting our time making predictions, we are going to continue to focus on the data (we're of the mind that we're now back in a data-dependent mode) and how the market acts around those pesky overhead resistance zones. First stop: 1291, the 150-day ma on the S&P 500.
Turning to this morning: No deal for Greece's second bailout, and a report that Moody's has placed three French banks on review for potential downgrades due to exposure to Greece's debt, is putting pressure on equities across the pond and here in the U.S. And then the report from the Empire Manufacturing Index (see below) may actually fall in the "disaster" category and has pushed the futures lower.
On the economic front: The Consumer Price Index for May rose by 0.2%, which was above the consensus for +0.1%. When you strip out food and energy, the so-called Core CPI came in with a gain of0.3%, which was also above the expectations for +0.2%
Next up, The Empire Manufacturing Index (designed to indicate the state of the manufacturing sector in the New York region) for June was reported at -7.79, which was well below the consensus expectations for a reading of 11.72. In addition, the Employment Index was reported at 10.20 vs. 24.73 in May, while the New Orders component fell to -3.61 vs. 17.19.
Thought for the day: Knowing what you don't know is vital to problem solving (and to the stock market game).
Here are the pre-market indicators we review each morning before the opening bell:
- Major Foreign Markets:
- Australia: -0.34%
- Shanghai: -0.90%
- Hong Kong: -0.68%
- Japan: +0.28%
- France: -0.78%
- Germany: -0.53%
- London: -0.24%
- Australia: -0.34%
- Crude Oil Futures: -$0.77 to $98.60
- Gold: -$7.40 to $1517.00
- Dollar: Lower against the yen, higher vs. the euro and pound
- 10-Year Bond Yield: Currently trading at 3.079%
- Stocks Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -17.27
- Dow Jones Industrial Average: -127
- Nasdaq Composite: -19.44
- S&P 500: -17.27
Wall Street Research Summary
- PetroChina (PTR) - BofA/Merrill
- Fortress Investment (FIG) - Credit Suisse
- NetAp (NTAP) - Credit Suisse
- SL Green (SLG) - FBR Capital
- Petroleum Development (PETD) - JPMorgan
- Swift Transportation (SWFT) - JPMorgan
- Mocros Systems (MCRS) - Mentioned positively at Oppenheimer
- AppliedMicro (AMCC) - Mentioned positively at Oppenheimer
- VMware (VMW) - Mentioned positively at Oppenheimer
- Aruba Networks (ARUN) - UBS
- Hospitality Properties (HPT) - Wells Fargo
- Impax Labs (IPXL) - Target cut at RBC
- Hovnanian (HOV) - Target cut at UBS
Long positions in stocks mentioned: VMW