Daily State Of The Markets: Time To Go The Other Way?

Includes: DIA, SPY
by: David Moenning

Good morning. For much of the past seven weeks, stocks have been entrenched in what the bears will term a correction and/or what the bulls refer to as a consolidation phase. And just about the time our furry friends in the bear camp had gotten everyone convinced that the only direction the stock market could head going forward would be down, something strange occurred - some good news showed up. Yep that's right, despite the less then stellar earnings season, the worries over the election, and the fretting over the Fiscal Cliff, Thursday's bushel basket full economic statistics contained news that was largely better than expected. As such, the question on my mind at the moment is this: Was Thursday just an oversold bounce or is it time to go the other way?

Those who view the world from a glass-is-half empty perspective tell me that a bounce was to be expected, but that it likely won't last. The rationale offered up to justify the position included the facts that (a) stocks were oversold from a near-term perspective and (b) that investor sentiment had become overly negative. So, with stocks still in a downtrend on the charts, my bearish buds tell me that the type of move we saw yesterday was nothing more than a countertrend rally and that soon, the negativity will resume.

The problem, I'm told, is that the economy is weak and that the theme from the current earnings parade is likely to be replayed in the coming quarters. Sure, EPS estimates have been exceeded on a regular basis my friends in fur remark. However, they go on to excitedly point out that most companies are missing on the top line revenue numbers, which, in the long run, will lead to more layoffs and less consumer spending. And then in an almost hysterical tone, I'm reminded that if the folks in Washington drive the economy off the Fiscal Cliff, well, yada, yada, yada.

Although I will admit that Corporate America did find a way to trip over the earnings expectations bar that was actually laying on the ground this time around as the likes of Apple (AAPL), Google (Google), IBM (IBM), Intel (INTC), Chipotle (CMB), GE (GE) and even Mickey D's (MCD) stunk up the joint with their reports this quarter. And while I will agree that the "Cliff" might be a problem, I also like to remain neutral in the ongoing battle between good and evil that takes place at the corner of Broad and Wall everyday and think for myself every once in a while. As such, I believe there is a chance that yesterday's plethora of data might have been the beginning of a new economic theme.

So, while reviewing economic data can be about as exciting as watching paint dry, please bear with me a moment while I run through the highlights of yesterday's reports. We start in China, where the fear is that the globe's most important economy might be slowing too much. However, both the official and unofficial (NYSE:HSBC) Purchasing Managers Indices came in above expectations and the trend of the data series appears to be heading in the right direction. Thus, we can probably take a hard landing for China's economy off the table for now.

Next up was the Challenger Report on Planned Job Cuts. To be fair, this was not an upbeat report as the number of planned layoffs surged in October - likely in response to the economic slowdown seen over the past few months. But after that, the reports had a distinctly upbeat flavor to them.

For example, ADP said that the private sector produced 158K jobs in October, which was above expectations. In addition, the September totals were revised higher. Then the report on Weekly Jobless Claims showed that initial claims for unemployment insurance did not balloon, indicating that perhaps this data series was stabilizing.

Next was the Consumer Confidence number, which was above last month's reading and wound up being at the best level seen since February 2008. Then there was the Unit Labor Cost number, which made it clear that inflation is not a problem at the current time (which allows the Fed to continue to focus on unemployment). Now mix in the ISM Manufacturing report, and well, I'm going to opine that if today's Jobs Report is above expectations, we just might be seeing a return of the BTE (better than expected) trade.

Yes, it is certainly true that one batch of improving data does not a trend make. But, it is a good start and there wasn't even a hint yesterday that things were weakening further. So, since stocks have been in a corrective/consolidation phase for quite a while now, it just might be time to go the other way for a spell (after all, it looks like a trading range environment to me).

Turning to this morning ... Asian markets followed Wall Street higher while European bourses are mixed at the moment. And here at home, traders appear to be waiting on the Jobs report as futures are flat to down slightly before the report.

On the Economic front ... We will get the Jobs report as well as the latest on Factory Orders.
Thought for the day ... It is better to be defeated on principle than to win on lies. -Arthur Calwell
Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell ...
  • Major Foreign Markets:
    • Shanghai: +0.60%
    • Hong Kong: +1.33%
    • Japan: +1.17%
    • France: -0.16%
    • Germany: +0.03%
    • Italy: -0.43%
    • Spain: +0.57%
    • London: -0.08%
  • Crude Oil Futures: -$0.73 to $86.36
  • Gold: -$7.70 to $1707.80
  • Dollar: lower against the yen, higher vs. euro, and pound
  • 10-Year Bond Yield: Currently trading at 1.723%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -0.14
    • Dow Jones Industrial Average: -14
    • NASDAQ Composite: +0.33
Positions in stocks mentioned: AAPL