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No Catalyst Needed

Daily State of the Markets
Thursday, October 11, 2012

Good morning. The question I've been asked most frequently this week is, "Why are stocks going down?" The question has usually been accompanied by some commentary stating that there really hasn't been any major negative data, news stories, headlines or even any significant new rumors out of Europe. It has also been pointed out that the Chinese markets have actually rallied a bit since coming back from a week long holiday and that Mitt Romney has been gaining in the polls. And yet stocks seem to be losing 100 points or more each day, with no end in sight. As such, the general sentiment behind the questions I've been asked is, what gives?

The easy response would be to offer up some pabulum about "profit taking" or "uncertainty" as the popular press tends to do. However, it has long been my stance that markets don't make big moves without a reason. And while the -2.27% pullback from the 9/14 high seen on the S&P 500 isn't exactly a debacle, the intraday moves lately have clearly been one-sided. Thus, I figure I've got some 'esplainin' to do to those asking me why we are seeing the sea of red lately.

Cutting to the chase, I believe that stocks are being sold (albeit by computer algorithms, which are clear as day if you are watching closely) on the idea that while there is a distinct lack of high profile catalysts at the present time, there are any number of large catalysts looming as well as some "little stuff" that hasn't been terribly encouraging. And the bottom line is that the guys and gals programming the machines believe that the future catalysts are going to be placed in the minus column.

The current expectations for what is going to happen next reminds me of the pervasively negative tone that traders had coming into 2012. If you will recall, anybody and everybody could rattle off the reasons that stocks were doomed as the macro backdrop appeared to be awful - with no hope in sight.

I'm going to opine that a similar mood has taken over at the corner of Broad and Wall (oops, I mean Mahwah, New Jersey) as traders now fear that earnings are going to stink up the joint, that China will fumble the stimulus ball, that Greece may leave the EU (I really can't believe we're STILL talking about this), that Spain isn't ever going to ask for help, that the children in Congress will never learn to get along and in the process push the U.S. over the fiscal cliff, that Middle East tensions will explode, and that maybe, just maybe Mitt Romney might win the election.

I know, that last one is a bit of a head scratcher. Most people are probably under the assumption that a Republican victory in November would be celebrated by the stock market. But since the Presidential debate, stocks have now moved lower - this despite the fact that Romney has moved up in the polls. The simple explanation is Mitt Romney has made it clear that he is not a fan of the Bernanke cavalry. In fact, Romney has stated that he would "fire Ben Bernanke." And while a President can't actually fire a Fed Chairman, our next Commander in Chief will be responsible for appointing the next head of the Federal Reserve. So, with Romney gaining in the polls, some traders fear that the punch bowl is going to get pulled from their QE party.

But I digress. The question of the day is why stocks are in decline when there hasn't been any big news to drive the action. My point this morning is that there is no big catalyst needed at the present time due to the facts that (1) there are a boatload of catalysts looming in the not-too distant future, (2) tech (especially the semi's) has been a disaster lately and everybody knows that tech leads the market, and (3) the earnings from the likes of Cummins (NYSE:CMI), Alcoa (NYSE:AA), and Chevron (CHV) as well preannouncement from Avnet (NYSE:AVT) have left a bad taste in the mouths of traders.

So with the bears clearly in possession of the ball right now, we will probably need to see the bulls come up with some sort of catalyst in order to put a stop to what appears to be the New England Patriots on the other side of the ball. Otherwise the bears may continue to roll for a while.

Turning to this morning... Despite a downgrade to Spain's sovereign debt rating, European markets and U.S. futures are modestly higher in the early going. Some suggest that the S&P downgrade to Spain will push Madrid to formally request aid from the EU, which would be viewed as a positive in terms of putting an end to the crisis in Europe.

On the Economic front... We'll get reports on Weekly Jobless Claims, Import/Export Prices, and the Bloomberg Consumer Comfort Index this morning. In addition the Treasury will auction off 30-year bonds today with results expected at 1:00 pm.

Thought for the day... Instead of just muddling through, why not make a concerted effort to enjoy your day to the fullest?

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

  • Major Foreign Markets:
    • Shanghai: -0.80%
    • Hong Kong: +0.38%
    • Japan: -0.57%
    • France: +0.66%
    • Germany: +0.73%
    • Italy: +0.39%
    • Spain: -0.29%
    • London: +0.65%
  • Crude Oil Futures: +$0.90 to $92.15
  • Gold: +$5.60 to $1770.70
  • Dollar: lower against the yen, euro, and pound
  • 10-Year Bond Yield: Currently trading at 1.696%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +3.74
    • Dow Jones Industrial Average: +25
    • NASDAQ Composite: +10.71

Positions in stocks mentioned: AAPL

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