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Borrowing From The Future?

Daily State of the Markets 
Tuesday Morning – October 12, 2010

Good morning. The nice thing about a day like Monday is it gives you time to do some noodling about the big picture. So, after watching the paint dry for much of the day, I have two thoughts to offer up for further consideration. First, we might be encountering a classic "buy the rumor, sell the news" trade right about now. And second, I'm concerned that we might also be eating into our holiday tidings at the present time.

With just about everybody on the planet now expecting the FOMC to initiate some sort of a quantitative easing program on November 3rd, it is clear that traders have been buying each and every dip in anticipation of Mr. Bernanke and his cavalry riding in on their white horses to save the day. While there is still some discussion about the amount of money the FOMC is going to be throwing at the bond market this time around (most expect to see something in the vicinity of $500 billion to $1 trillion), based on the Fedspeak we've been hearing lately, most traders view the launch of the QE2 as a done deal.

But given that the Dow has moved up a cool 1,000 points in anticipation of this big event, we should probably brace ourselves for some selling once the program is announced. In short, this would be the "sell the news" part of the trade. In addition, we might want to prepare ourselves just in case something a little less flashy than the now famous "shock and awe" the Fed strove for during the crisis. In other words, should the FOMC decide to "start small," stocks could easily see some disappointment-based selling.

The other notion that rumbled around in my head yesterday afternoon is that the current rally might be borrowing from the future. If you've been at this game a while, you know that the year-end rally is usually something you can depend on to bring some good cheer to your portfolio as the calendar year draws to a close. However, it is also worth noting that the year-end rally usually commences from some sort of weakness during the dreaded September/October period. But with stocks currently enjoying nothing short of a joyride to the upside, I can't help but wonder if we're aren't getting some of our year-end fun now.

Getting back to the here and now, in case you didn't do so yesterday, do yourself a favor and take a peek at a chart of the DJIA over the past eight or nine months. You'll quickly note that the DJIA has some resistance to contend with at the 11,000 area. And while the media is quick to celebrate any and all breaches of big, round numbers, we're not entirely convinced that it will be clear sailing from here. So, given that we've got a slew of earnings reports to review in the coming days (Intel after the close, JPMorgan on Wednesday, and then Google and GE later in the week) and an overbought market, a pause might be in order at some point soon.

Turning to this morning... We once again don't have much in the way of economic data to deal with so far. However, we will get the minutes from the 9/21 FOMC meeting this afternoon at 2:00 pm eastern. Traders will be looking for hints as to what will trigger the Fed's next move. Stock futures are pulling back this morning on the back of weak foreign markets and an improving dollar.

Finally, don't forget to check the happiness box today...

Pre-Game Indicators

Here are the important indicators we review each morning before the opening bell...

  • Major Foreign Markets:
    • Australia: -1.59%
       
    • Shanghai: +1.23%
       
    • Hong Kong: -0.37%
       
    • Japan: -2.09%
       
    • France: -0.87%
       
    • Germany: -0.48%
       
    • London: -0.65%

     

  • Crude Oil Futures: - $0.26 to $81.95
     
  • Gold: - $6.20 to $1348.20
     
  • Dollar: higher against the Yen, Euro and Pound
     
  • 10-Year Bond Yield: Currently trading lower at 2.362%

     

  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -4.90
       
    • Dow Jones Industrial Average: -40
       
    • NASDAQ Composite: -6.40

       

Wall Street Research Summary

Upgrades:

  • Verizon (NYSE:VZ) - Argus
     
  • DuPont (DD) - BofA/Merrill
     
  • Novatel Wireless (NVTL) - Canaccord Genuity
     
  • Agrium (AGU) - CIBC World Markets
     
  • HOneywell (NYSE:HON) - Mentioned positively at Deutsche Bank
     
  • Tyco (TYC) - Mentioned positively at Deutsche Bank
     
  • Essex Property (NYSE:ESS) - Goldman

     

    Downgrades:

  • Verizon (VZ) - Bernstein
     
  • InterActiveCorp (NASDAQ:IAC) - Cowen
     
  • CNOOC (NYSE:CEO) - HSBC, UBS
     
  • Kulicke & Soffa (NASDAQ:KLIC) - Jefferies
     
  • American Electric Power (NYSE:AEP) - Jefferies
     
  • Harmony Gold (NYSE:HMY) - Morgan Stanley
     
  • Turkcell (NYSE:TKC) - Morgan Stanley
     
  • DaVita (NYSE:DVA) - Piper Jaffray
     
  • Warner Chilcott (NASDAQ:WCRX) - Target increased at RBC Capital
     
  • Urban Outfitters (NASDAQ:URBN) - Estimates and targed reduced at UBS

     

    Long positions in stocks mentioned: none

    For more "top stock" portfolios and research, visit TopStockPortfolios.com

     


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