Daily State Of The Markets: Blame It On The Algos Or ...

Includes: DIA, SPY
by: David Moenning

Good morning. Yesterday's batch of economic data wasn't half bad. The Commerce Department said that Retail Sales were up +1.1% in the month of September, which was above the consensus for a third straight month. In addition, the number marked a two year high. This, on top of Friday's University of Michigan Confidence number, which was the highest in 5 years, as well as the recent drop in unemployment and the general uptick in housing, got me to thinking.

While this is clearly just one guy's opinion, it seems to me that those people with jobs and houses they can afford seem to be doing just fine, thank you, and their spending patterns are back to "normal." And yet, despite the good economic news of late, we've seen relentless selling in the stock market lately. Day after day, the same pattern occurs as almost any batch of green bars on an intraday basis is met with another batch of sell programs.

To put the recent selling into perspective, if the NASDAQ would have finished down on Monday, the composite would have been down seven days in a row. And while that may not sound like a big deal, Bespoke tells us that there have only been 15 other such streaks since 1990. In other words, a stretch of seven straight red days is not normal.

To be honest, the recent bout of selling has had me scratching my head a bit because, as I just mentioned, this type of intraday action just isn't normal. Yes, I understand that stocks can go and do go down for days on end and that a corrective phase can last several months. And to be honest, the action has reminded us here in my office of the bad old days seen in May. However, the primary difference is that there were reasons for stocks to decline in May. Stocks had run up on data that was better than expected and then suddenly the data stopped being good. And then there was Europe - again.

But this time around, there are no incendiary headlines from across the pond and the economic data isn't bad. In short, there haven't been any obvious triggers or catalysts for the selling being done day after day. So, my question is if this is merely the algos being programmed to reflect their masters' negative macro view or something else?

To be sure, the bears have plenty of negatives they can point to. The "growth slowing" theme in the world's major economies, the fiscal cliff, the reduction in earnings, and the debt crisis, etc. have all been discussed in detail. But again, there hasn't been anything terribly "new" to speak of with regard to any of these topics over the past month.

I also have found it strange that a stock like Apple (AAPL) has been sold day after day lately. This despite the fact that the company just had a boffo release of the iPhone5 and the expectations for the iPad Mini aren't half bad. The company is printing money and is not overvalued. So why then are we seeing the continued selling?

Then it hit me. It's October. The month that marks the fiscal year ends for a great many mutual funds. And with rates on capital gains slated to go up on January 1st, it makes sense that the funds may want to (a) lock in some of the big gains and (b) take some chips off the table before individuals start to do their tax harvesting.

Remember, if Congress doesn't do something about the fiscal cliff before January 1st, the tax rate on capital gains is going to go up from 15% to 20%. And if my math is correct, that represents a 33% increase. So, given that our elected officials continue to worry more about reelection and bickering with the other side than actually getting anything done, I'm guessing that anyone looking to sell ANY stock in the near future is going to do so before the end of the year. And with such a well publicized deadline, many investors may be trying to get ahead of the curve right now.

So, while I would love to blame the boyz and their fancy computer toys for messing with the market on a daily basis, it looks to me like there just might be something else at work here. So, if traders continue to sell all the rallies for the next couple of months without any new negative catalysts, at least we'll have one good reason as to why.

Turning to this morning ... Stock futures are moving higher this morning in tandem with European markets on word that Spain is close to requesting aid from the EU and that the request will not require the country to implement any further austerity measures. In addition, analysts are watching earnings from Goldman Sachs (NYSE:GS), Johnson & Johnson (NYSE:JNJ), Coca-Cola (NYSE:KO), and UnitedHealth (NYSE:UNH) this morning.

On the Economic front ... We'll get reports on CPI, Industrial Producting and the NAHB Housing 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:
    • Shanghai: +0.01%
    • Hong Kong: +0.28%
    • Japan: +1.44%
    • France: +1.02%
    • Germany: +1.21%
    • Italy: +0.97%
    • Spain: +1.63%
    • London: +0.99%
  • Crude Oil Futures: +$0.21 to $92.06
  • Gold: +$7.00 to $1744.60
  • Dollar: lower against the yen, euro, and pound
  • 10-Year Bond Yield: Currently trading at 1.692%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +7.07
    • Dow Jones Industrial Average: +66
    • NASDAQ Composite: +11.78
Positions in stocks mentioned: none