Daily State of the Markets: After the Deluge

by: David Moenning

Good morning. The bears clearly had an opportunity on Friday. For starters, the market had run up nearly 6.7% in a matter of eight trading days and as such, the major indices were back to within spitting distance of their April 29 highs. Next, the joyride to upside had created an overbought condition and there was resistance looming. Then there was the fact that it was a summer Friday, which tends to lead to traders taking profits and heading home early. Oh, and lest we forget, the quarterly earnings parade is close at hand, giving anyone on the fence a reason to stay there. And finally there was the jobs report, which saw adjectives such as "terrible," "disastrous," and "shocking" used to describe the biggest miss in quite some time.

Given all of the above, one might have expected to see the market take a serious tumble. After all, the market had run a long way in a very short period of time based on the idea that the soft patch may turn out to be temporary. Therefore, with the Big Kahuna of economic data coming in below even the lowest expectations, it would have been natural for the bears to argue that the recent rally's raison d’être was seriously flawed.

Although I didn't have an internet connection at the time, my first reaction was, "Oh boy, here we go." While I am of the mind that the jobs report has itself proved over the past six months to have some pretty serious flaws and that this report was in stark contrast to the rest of the data we'd seen recently, I still figured that the bears would use this big miss as an opportunity to break some moving averages and maybe even test the near-term support. In short, I was worried that I didn't have my helmet with me on the last leg of my wondrous journey.

To be honest, I was a little surprised that the DJIA only opened down 110 or so. And while I figured that there was another surge to the downside coming at some point during the day, I viewed the modestly lower open as a positive. The bottom line is the fact that the market didn't collapse at the open or shortly thereafter would likely be considered "good action" by technicians.

As expected, the bears did find an opportunity to test the mettle of the bulls within the next couple hours. But once again, our furry friends were unable to make their case stick. Before long the dip-buyers were doing their thing and in the end the indices finished with losses that weren't exactly terrifying. Thus, you have to ask yourself if bulls have been able to turn the tide on sentiment here.

Two weeks ago, the market would have been destroyed on such a "set up" (i.e. an overbought condition, the indices bumping into resistance and then a downside trigger in the form of the jobs report). But in this case, the bears couldn't even snap the five-day moving average or break below the 1340 level on the S&P 500, which is arguable near-term support. Interesting.

From a bigger picture perspective, you also have to ask yourself a couple more questions. First, are the expectations for the economy better now than they were on April 29? And along the same lines, are the expectations for earnings any better than they were when the market put in the most recent high-water mark? And finally, are the worries about sovereign debt off the table now or merely pushed aside for the time being?

Although the market action on Friday was clearly "constructive," we should recognize that the questions relating to sovereign and domestic debt, the state of the economy (especially the jobs market), and earnings are likely to drive the action in the near-term. So, with some serious resistance overhead, and renewed concerns about Europe and China, you also have to ask yourself if the bears might soon find a reason to get back in the game.

Turning to this morning: China's CPI report is creating new worries about monetary policy and economic growth in the world's strongest economy. In addition, Europe's sovereign debt is back in the news this morning with Italy suddenly in the spotlight. With foreign markets lower across the board, it appears that Wall Street too is headed for a lower open.

On the economic front: There is no economic data slated for release before the bell this morning.

Thought for the day: Remember that happiness is a choice. What will you choose today?

Pre-Game Indicators

Here are the pre-market indicators we review each morning before the opening bell:

  • Major Foreign Markets:
    • Australia: -1.47%
    • Shanghai: +0.18%
    • Hong Kong: -1.67%
    • Japan: -0.67%
    • France: -1.72%
    • Germany: -1.13%
    • London: -0.49%
  • Crude Oil Futures: -$1.38 to $94.82
  • Gold: +$12.30 to $1553.90
  • Dollar: Higher against the yen, euro and pound
  • 10-Year Bond Yield: Currently trading at 2.955%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -15.30
    • Dow Jones Industrial Average: -103
    • Nasdaq Composite: -22.90

Wall Street Research Summary

Upgrades:

  • TJX Companies (TJX) - Barclays
  • Lam Research (LRCX) - Citi
  • ASML Holding (ASML) - Citi
  • KLA-Tencor (KLAC) - Citi
  • HollyFrontier (HFC) - Added to Buy at Deutsche Bank
  • Higher One Holdings (ONE) - Goldman Sachs
  • Whole Foods (WFMI) - Goldman Sachs
  • Micosemi (MSCC) - Oppenheimer
  • RF Micro Devices (RFMD) - Mentioned positively at Oppenheimer
  • Universal Health (UHS) - Estimates increased at UBS

    Downgrades:

  • Teekay Tankers (TNK) - BofA/Merrill
  • Mattel (MAT) - Estimates reduced at BMO Capital
  • Hasbro (HAS) - Estimates reduced at BMO Capital
  • BlackRock (BLK) - Removed from Top Picks list at Citi
  • CEMEX (CX) - Credit Suisse
  • Advanced Micro (AMD) - JMP Securities
  • Torchmark (TMK) - JPMorgan
  • Teradata (TDC) - KeyBanc
  • Shaw Group (SHAW) - RW Baird
  • SunPower (SPWRA) - RW Baird
  • Corning (GLW) - Estimates cut at UBS

    Long positions in stocks mentioned: None