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Is The Focus Shifting?

Daily State of the Markets 
Thursday Morning - March 17, 2011

Good morning. Although Tuesday was a wild ride at the corner of Broad and Wall, the action did actually seem to make sense. The market had basically held true to its news-driven moniker by falling on bad news relating to the risk of a nuclear catastrophe and then rising when those worries abated in the afternoon. As such, one might have expected more of the same on Wednesday. And with the news out of Japan appearing to be favorable in the early going, it looked like the worst of this corrective phase might be behind us.

While stocks opened lower on Wednesday, the dip-buyers did their thing early on and by mid-morning things weren't looking too bad. Well, until Dow Jones ran a headline that the computers latched onto in a big way, that is. At 10:51 am eastern daylight time, the Dow stood at 11,815. Less than nine minutes later, the venerable index was more than 100 points lower and in a free-fall. The IM's and emails came fast and furious... Was there a meltdown? Did radiation hit Tokyo? Had there been another explosion?

In short, the answers were no, no, and no. Nope, the computers had grabbed the headline that the EU's Energy Chief had termed the Japanese nuclear "out of control," and warned of "catastrophic events" in the next few hours. Never mind the fact that these comments were actually made earlier and appeared to have been taken out of context. The computers put the headlines together and sell programs were run early and often.

While I, for one, am growing tired of the mindless algorithm-driven trading that seems to be in charge of most moves these days, I guess I really can't blame the boys and their toys here. The headline was released and the programs certainly did their job. But from there, things got a little strange. You see, after a few minutes, the issue relating to the timing of the headline was "out" and while we did see a nice little bounce on the update, the operative word here is little.

At 2:00 pm the computers struck again, taking the Dow down another hundred points and once again, in short order. What was strange here was that there didn't seem to be a headline to work off of and the market wasn't just falling within a trading range, it was breaking down to new lows - in a big way. Thus, from where I sat, something appeared to be up.

To finish off the review of Wednesday's violence, stocks did bounce hard around 2:15 in response to word that a new power line was close to being finished, which could "solve the crisis" (yep that was the headline). Not surprisingly, the Dow popped about 150 points in response. But from there, once again, something strange happened. Instead of rallying furiously into the close as one might have suspected, the market continued to sink until the closing bell rang.

So, what should we make of the action? Is there anything to be gleaned here or was this just another case of traders having fun with their computers? While I reserve the right to say "never mind" if things start to go the bulls' way tout suite, I'm of the mind that we might be seeing a shift in focus among the traders that don't use a computer to do their work.

If you will recall, the big correction last summer started off as what I'd term a "bad news panic" based on fears relating to the risk of sovereign debt contagion. But after the "Flash Crash," the focus shifted from what might happen if Greece and/or the rest of the PIGI'S were to default on bonds to the reality that the U.S. economy was entering a "soft patch." And just like that, talk of a double-dip recession was everywhere.

So, given the messy headlines over the past month, the spike in gasoline prices, and now the nightmares seen in Japan, it doesn't take a supercomputer to figure out that the economy just might be at risk here if things don't improve - and quickly. And given that I'm starting to hear the word "de-risking" again for the first time in quite a while, I'm concerned that the focus of the market may indeed be shifting.

My apologies for the long-winded ramble this morning and again, I could be wrong and/or early on this. But the idea of the market's focus shifting to what could happen in the U.S. economy is something I'll be watching for in the coming days.

Turning to this morning... With helicopters, water cannons, and fire trucks dousing the Dai-Ichi reactors with water overnight, the situation appears to be less dire and the Nikkei finished well off its lows. However, U.S. officials are calling for U.S. citizens to leave Japan and the recent water cannon work has been called off due to radiation levels. But given that there has been no serious release of radiation and that a new power line is now connected, European markets and U.S. futures are moving up strongly in the early going.

On the Economic front... The Consumer Price Index for February rose by +0.5%, which was above the consensus for +0.4% and also January’s reading of +0.4%. When you strip out food and energy, the so-called Core CPI came in with a gain of +0.2%, which was a tenth above expectations but in line with January’s +0.1%.

Next up, Initial Claims for Unemployment Insurance for the week ending 3/12 fell by 16K to 385K. This was in line with the consensus estimate for 385K and last week’s total of 401K.Continuing Claims for the week ending 3/5 came in at 3.706M vs. 3.750M and last week’s 3.786M.

We'll also get reports on Industrial Production and Capacity Utilization, LEI, and the Philly Fed this morning.

Thought for the day: Remember that it pays to be open minded (in more ways than one)...

Pre-Game Indicators

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

 

  • Major Foreign Markets:
    • Australia: -0.12%
       
    • Shanghai: -1.14%
       
    • Hong Kong: -1.83%
       
    • Japan: -1.44%
       
    • France: +1.05%
       
    • Germany: +0.95%
       
    • London: +0.86%

     

  • Crude Oil Futures: +$2.44 to $100.39
     
  • Gold: +$3.90 to $1400.00
     
  • Dollar: lower against the Yen, Euro, and Pound
     
  • 10-Year Bond Yield: Currently trading at 3.263%

     

  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +20.02
       
    • Dow Jones Industrial Average: +143
       
    • NASDAQ Composite: +34.2

 

Wall Street Research Summary

Upgrades:

  • Lockheed Martin (NYSE:LMT) - BAC/ML
     
  • Comerica (NYSE:CMA) - BMO Capital
     
  • Children's Place (NASDAQ:PLCE) - BMO Capital
     
  • Amgen (NASDAQ:AMGN) - Added to short-term buy at Deutsche Bank
     
  • Noble Energy (NYSE:NBL) - Target increased at FBR
     
  • Parker-Hannifin (NYSE:PH) - KeyBanc
     
  • Cree (NASDAQ:CREE) - Merriman Capital
     
  • Motorola Mobility (NYSE:MMI) - Nomura Securities
     
  • ProLogis (NYSE:PLD) - Stifel Nicolaus
     
  • Akamai (NASDAQ:AKAM) - Stifel Nicolaus

 

Downgrades:

  • Devon Energy (NYSE:DVN) - Argus
     
  • American Eagle (NYSE:AEO) - BMO Capital
     
  • JPMorgan(NYSE:JPM) - Estimates cut at Citi
     
  • Goldman Sachs (NYSE:GS) - Estimates cut at Citi
     
  • Morgan Stanley (NYSE:MS) - Estimates cut at Citi
     
  • Bank of America (NYSE:BAC) - Estimates cut at Citi
     
  • Lazard (NYSE:LAZ) - Estimates cut at Citi
     
  • Health Manageement (NYSE:HMA) - Leerink Swann
     
  • Lifepoint Hospitals (NASDAQ:LPNT) - Leerink Swann
     
  • BMC Software (NASDAQ:BMC) - Stifel Nicolaus

 

Long positions in stocks mentioned: None

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