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Dueling Dangers? Or...

Daily State of the Markets 
Thursday Morning – November 18, 2010

Good morning. Stocks did a lot of nothin' on Wednesday as traders attempted to discern if the worries about China were overblown and if the renewed contagion fears stemming from a couple of the PIGI'S were worthy of further corrective action. The bears argue that the dynamic duo of China and Ireland/Portugal represent "dueling dangers" for anyone long equities these days. But as you might have guessed, our heroes in horns don't quite see things the same way.

And so it goes after a eight-day losing streak that has managed to produce a decline of just about -4% from top to bottom. The glass-is-half-empty gang suggests that the market has yet to fully grasp the danger lurking out there and that there is clearly more downside to come. Yet those sporting the latest fashion in rose-colored eyewear quickly counter with something along the lines of, "enough already."

In short, this is the stuff that corrections/pullbacks are made of. After an impressive buying binge lasting nearly three months and based on the expectations that everything is going to be peachy keen going forward into 2011 now that Bernanke & Co. are back on the case, some buyer's remorse may have set in over the past couple of weeks. And given the heat that Helicopter Ben has been taking lately, a pullback was to be expected.

However, the question going forward is best summarized by the title of this morning's missive. Will the worries relating to China's tightening policies and the contagion fears of the banks in peripheral Europe prove problematic going forward? Or has the current bout of profit-taking been sufficient to take the froth that was building up in early November out of the game? Hmmm...

As a card-carrying member of the market optimists club, my heart tells me to give the bulls the benefit of the doubt in these situations. And the early action this morning would seem to warrant such an approach. However, the indicators I use to drive my investment decisions in the near-term are not nearly as upbeat at the moment as there have been some negative divergences building for some time. Now toss in the calendar and you've got yourself a dilemma on your hands.

So... which is it? Is the current dance to the downside simply another buying opportunity in this year's run into the New Year celebrations? Or should we heed the technical action and become more cautious? The bottom line is that this dilemma presents an opportunity to identify the type of investor you are and the time frame in which you play the game. For me, I try my level best to understand the drivers of the market on a shorter-term basis and then let my indicators guide my decisions. This allows me to examine all sides of the issue without becoming overly emotional about the outcome.

The key here is to understand that you WILL be wrong in this business - oftentimes on a daily basis. So, as Ned Davis wrote so eloquently, the game isn't about being right, it's about making money. Thus, with my indicators telling me it is time for some caution, I'll heed this advice - with the understanding that things can change quickly.

Turning to this morning... Stock futures are posting solid gains in the early going as investor appetite for risk assets appears to be returning amid rising hopes a solution to Ireland's banking crisis is near at hand.

On the economic front... We will get Initial Jobless Claims at 8:30 am.

Finally, try doing something nice for someone today (for no reason at all)...

Wall Street Research Summary

Upgrades:

  • Suntech Power (NYSE:STP) - Citi
     
  • Qualcomm (NASDAQ:QCOM) - Credit Suisse
     
  • Estee Lauder (NYSE:EL) - Oppenheimer
     
  • Motorola (MOT) - Initiated Buy at Stifel Nicolaus
     
  • Logitech (NASDAQ:LOGI) - Initiated Hold at Stifel Nicolaus

     

    Downgrades:

  • Alcatel-Lucent (ALU) - Credit Suisse
     
  • Research in Motion (RIMM) - Stifel Nicolaus
     
  • General Maritime (NYSE:GMR) - Wells Fargo
     
  • Cisco Systems (NASDAQ:CSCO) - First Global

     

    Long positions in stocks mentioned: None

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

     


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