Daily State Of The Markets: A Frightening Outlook?

Includes: DIA, SPY
by: David Moenning

Good morning. With the stock market having been closed for the past two days, anyone not residing on the East Coast was provided with some time to step back and review the big picture outlook for the economy and the stock market. There is little doubt that after having been turned off for a couple days, the computers will be rearing to go this morning. But after the initial burst of trading demand wears off and traders settle in again, I for one will be looking to see what type of attitude develops toward the future.

You see, I can see things going either/both ways in the near term. I figure that stocks could easily move higher as traders breathe a sigh of relief that Sandy didn't do more damage. And given that Europe was up 1% on Tuesday, I can also see how the U.S. might need to play a little catch up. Yet at the same time, there are some big-picture question marks that did not suddenly get solved while the nation watched the super-storm ravage the Eastern seaboard. Oh, and last I checked, the earnings season is still stinking up the joint and the major indices are in a downtrend.

I guess I could take the easy way out and focus on my models (which are neutral right now, indicating an "iffy" environment). Or I could simply let Ms. Market "tell" me what she is thinking by watching what transpires next on the charts. In short, my chart-watcher friends tell me that a break below 1400 on the S&P 500 would be a problem. The thinking is that the algos will definitely know what to do with such a break of support as "technical selling" would come in as well as a test of the 200-day moving average. And finally, if 1400 does give way, the intermediate trend will also be down. Thus, the techies say a full-fledged correction would be "on."

My problem with being a pure technician - who believes that "the charts tell all" - is that there is usually a "reason" that the market breaks a support zone, a trendline, or an important moving average. So, IF (note the use of the capital letters) the bears can push the S&P below such an important level (that everybody and their computers see), I'm assuming that there will be a reason for the action. And my guess is that reason would likely to be tied to the macro outlook.

In case you've been asleep in a cave over the past couple of months, the macro "issues" are fairly obvious. First, we've got the election in seven days. From the stock market's perspective, the results of the election will likely have an important impact the economic outlook on many fronts. Perhaps the best summary I've seen on this topic came from a tweet on Tuesday that basically said if Obama wins: buy bonds and sell stocks. And if Romney wins: buy stocks and sell bonds.

Next up is the issue of the Fiscal Cliff. If you will recall, the "Cliff" was created by the geniuses in Congress. Back in the fall of last year, they put together a super committee of bipartisan players who were supposed to come up with a way to cut the budget deficit by Thanksgiving of last year. The deal was that if they failed, a series of automatic cuts would go into effect in January 2013. The idea was to incent the politicians to come to a bipartisan deal on this vital topic. But of course, they couldn't get it done and the White House stayed out of it. And since nothing has been done on the issue since, in just two months the automatic cuts are scheduled to be made - pushing the U.S. into recession in the process. Unless, as the saying goes, Congress winds up doing the right thing - after exhausting all other possibilities, of course.

While I'd like to think that the outcome of the presidential election will have an impact on what so far can only be described as the ridiculously childish games being played by the professional politicians that are supposedly looking out for us in Washington (yes, there was sarcasm intended and all readers are instructed to also insert an eye roll here), I am not entirely optimistic on this subject. The reasoning here is simple: They haven't agreed on anything for more than two years, why would we expect them to agree on something now?

Please accept my apologies for the unexpected and inadvertent political rant. But the "stuff" that has been going on in our nation's capital is infuriating and downright embarrassing. So whoever the next president is, they had best be able to swing a mighty big stick to get this group to act.

This brings me to the last point. In my freshman year of college, I took my first economics class. As I recall, we used to draw a lot of diagrams to indicate what-leads-to-what from an economic standpoint. One such diagram sums up the problem with the economy and looks like this:

Increasing GDP Growth --> Job Creation --> Increased Consumer Spending --> Increasing GDP Growth

Pretty simple stuff, right? The only problem is that the Fed has done everything it can to get the first part started - but so far we are seeing DECREASING GDP Growth on a year-over-year basis. This is largely because of the fact that monetary policy is supposed to go hand-in-hand with fiscal policy. But, well, don't get me started again. So, unless somebody somewhere can figure out a way to get the first part of my little diagram going in the right direction, we may indeed be facing a fairly frightful outlook.

Turning to this morning ... Overseas markets were higher overnight, with European bourses now up more than 1% to 2% since the U.S. last traded. U.S. futures are following suit and pointing to a strong open on Wall Street. A sigh of relief as well as the traditional end-of-month window dressing are being cited as reasons for the early strength. However, there are concerns about how the U.S. markets will function this morning. After all, the last time the U.S. market closed for two consecutive days due to weather was in 1888 and the challenges facing the NYSE are enormous.

On the Economic front ... We will get the reports on the Employment Cost Index and Chicago PMI this morning.
Thought for the day ... Empty pockets never held anyone back. Only empty heads and empty hearts can do that. - Norman Vincent Peale
Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell ...
  • Major Foreign Markets:
    • Shanghai: +0.32%
    • Hong Kong: +1.00%
    • Japan: +0.97%
    • France: +0.36%
    • Germany: +0.64%
    • Italy: +0.86%
    • Spain: +0.87%
    • London: -0.14%
  • Crude Oil Futures: +$0.69 to $86.37
  • Gold: +$8.10 to $1720.20
  • Dollar: higher against the yen, euro, and pound
  • 10-Year Bond Yield: Currently trading at 1.747%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +9.56
    • Dow Jones Industrial Average: +66
    • NASDAQ Composite: +9.03
Positions in stocks mentioned: none