Good morning. Although the volume has been uninspired of late, the technicians tell us that stocks have broken out of a double-bottom formation over the past two sessions and that the indices are now embarking on a new rally phase, which is likely to last a while. While the possibility of the dreaded "breakout fakeout" remains present, I will have to admit that the recent price action is in keeping with the waterfall decline script. And the good news is that if the market has indeed embarked on a new uptrend, this means the recent insanity has likely ended.
To review, waterfall declines normally see an emotional/panic low accompanied by a surge in volume which is then followed by a "big bounce," a retest of the lows, and then finally, a meaningful advance. Traditionally, this process takes about three months to complete and is accompanied by any number of changes to the prevailing sentiment in the market.
On that score, it appears that the current attitude is "it's all good." Europe's problems are apparently no longer a concern. The economy in the U.S. is "just fine, thank you." Banks? No worries. And of course, China's continued tightening campaign isn't anything to get uptight about. All because the Fed is about to embark on more quantitative easing. (But for the record, how did that plan work out for the economy last time?)
But I digress. The key point this morning is that that advent high frequency trading, the infatuation with leveraged ETFs, the elimination of the uptick rule, and the shift from human market makers to electronic exchanges have caused everything to move faster. Thus, the process that has taken three to four months in the past may have now occurred in 18 trading days.
As such, the bulls will tell us that the insanity is over. And in looking at some of the stats over the last few weeks, the action has been nothing short of insane. Never mind the inordinate number of triple-digit days we've seen or the consecutive sessions in which the S&P was up or down more than 4%. No, from where I sit, the true insanity is seen in the one-sidedness of the moves that took place.
According to Ned Davis Research, on August 8, every single constituent of the S&P 500 finished in the red. To say this is rare is indeed an understatement. In addition, declining volume exceeded advancing volume by a measure of nearly 600 to 1. To put this in perspective, we used to track the number of days in which the volume was 9-to-1 and/or 10-to-1 in favor of one team or the other. But 600-to-1 would appear to be a new stat to keep track of. Two days later, traders decided to simply "go the other way" as nearly all of the 500 S&P companies rose.
Fast forward to more recent happenings. On August 29, the amount of up-volume swamped down-volume by a measure of 99-to-1, 98% of all stocks had moved above their 10-day moving averages, and the correlation of stock performance to the S&P 500 hit an all-time of 85.6%. And with stocks now having advanced 8.8% off the low over the past seven days, happy days are here again, right?
So has the waterfall decline finally ended? Will we now see a resumption of a more "sane" trading pattern? Frankly, it is hard to tell. From where I sit, I think we are still at the mercy of the data and the expectations as to what the powers-that-be on both sides of the Atlantic will do next. As such, we will continue to monitor the action closely and try to see through all the volatility and computer-driven insanity.
Turning to this morning: Disappointing economic data from Europe (European PMIs) and concerns about more tightening in China have put the futures in a modestly defensive stance at this point.
On the economic front: Initial claims for unemployment insurance for the week ending Aug. 27 fell by 12,000 to 409K, which was worse than the consensus estimate for 409K and last week’s revised total of 421K (up from 417K). Continuing claims for the week ending Aug. 20 came in at 3.735M vs. 3.667M and last week’s 3.753M.
Next, the government reported U.S. non-farm productivity in the second quarter fell by 0.7%, which was below the estimates for reading of -0.5%. On the inflation front, unit labor costs were reported to have risen 3.3% versus the expectations for +2.6%.
Note that we will get reports on Bloomberg Consumer Comfort, construction spending, and the all-important ISM Manufacturing Index later this morning.
Thought for the day: Remember that there is more to life than increasing its pace.
Here are the pre-market indicators we review each morning before the opening bell:
- Major Foreign Markets:
- Australia: +0.29%
- Shanghai: -0.44%
- Hong Kong: +0.25%
- Japan: +1.19%
- France: -0.97%
- Germany: -1.69%
- Italy: -1.02%
- Spain: -0.83%
- London: -0.39%
- Australia: +0.29%
- Crude Oil Futures: -$0.31 to $88.50
- Gold: -$0.30 to $1821.40
- Dollar: Lower against the yen, higher vs. the euro and pound
- 10-Year Bond Yield: Currently trading at 2.202%
- Stocks Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -2.29
- Dow Jones Industrial Average: -10
- Nasdaq Composite: -0.70
- S&P 500: -2.29
Wall Street Research Summary
- Arch Coal (ACI) - BMO Capital
- Pioneer Natural (PXD) - Target increased at Canaccord Genuity
- Qualcomm (QCOM) - Added to Top Picks Live at Citi
- Brightpoint (CELL) - Citi
- Concho Resources (CXO) - Morgan Keegan
- CIT Group (CIT) - Mentioned positively at Morgan Stanley
- Cognizant Technology (CTSH) - Needham
- Wesco International (WCC) - Oppenheimer
- Trimble Navigation (TRMB) - Piper Jaffray
- Deutsche Telekom (DT) - Bernstein
- Goldman Sachs (GS) - ISI Group
- Barnes Group (B) - Oppenheimer
- WW Graninger (GWW) - Oppenheimer
- RPM International (RPM) - Oppenheimer
- F5 Networks (FFIV) - Target decreased at UBS
Long positions in stocks mentioned: None