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Fakeout #4?

Daily State of the Markets 
Tuesday Morning - October 18, 2011

Good morning. Part of the problem with trying to interpret the technical movements of the market these days is everybody in the game looks at charts and even the most sophisticated technical indicators can be found free on the web. You want live quotes with fancy moving averages and a host of other indicators? No problem; click, click, click and you've got the chart in front of you. Thus, as with anything that becomes too popular, the value of many tried and true indicators has been lessened over the years and some indicators just don't work at all anymore.

A case in point would be put/call ratios, which at one time, were a cutting edge way to look at what investors were doing and thinking in their portfolios. However, as computers have taken over, allowing trading strategies to become ever more sophisticated and easier to use, the indicator has become practically useless. I could go on with other examples, but I'm pretty sure you get the point here.

My concern is that with SO MANY traders, investors, and managers now using ETF's as a quick and easy way to gain exposure to the market and SO MANY people looking at the same thing on the charts, even something as reliable as support and resistance zones may be becoming less valuable. Many years ago, the concepts behind support and resistance zones was rooted in human behavior. But as I've said many times lately, the HFT programs don't know about support and resistance. The computers execute the trades in microseconds, regardless of where the upper or lower reaches of a trading range may be. As such, the indices get pushed into areas they may not have otherwise visited.

I'm of the opinion that it is for this reason that so many apparent "breakouts" on the charts ultimately wind up being "fakeouts." While this market can and often does turn on a dime, it appears that Friday's breakout has turned into the fourth"breakout fakeout" of the current trading range. Thus, anyone trading for a breakout or placing stops above or below the high and low points of the range has been beaten up pretty badly recently.

At least yesterday's reversal, which appears to have put all the major indices save the NASDAQ right back in their trading ranges, made sense. Up until Monday morning, traders appeared to have been working under the assumption that European leaders had suddenly had an epiphany and were about to solve the debt crisis by the end of the week. Silly as that may sound to anyone who understands the problems of too much debt and not enough income, the hope was that we'd soon be able to put this year-old episode behind us.

Speaking of putting things in the rear-view mirror, traders also had been betting that the recent weakness in the U.S. economy was over and that growth would start to pick up soon. To be sure, most of the recent economic data has seemed to run counter to the ECRI call that the U.S. is about to enter a recession and there isn't a darn thing that either the Fed or the children in Washington can do about it (assuming they would quit fighting long enough to actually try to do something constructive for the country).

But on Monday morning, a couple of pretty important Germans suggested that market participants might be getting their hopes up a little too high on the idea that the European debt mess would end on Sunday. Both Chancellor Angela Merkel and Finance Minister Wolfgang Shaeuble said early Monday that although the EU leaders may agree on a comprehensive package to deal with Greece, bank capital and credit contagion by Sunday evening, the problems aren't going to magically be solved. And just like that, European markets as well as U.S. stock futures turned around and headed lower in earnest.

Now toss in some not-so hot earnings reports from the likes of Citi (although the folks at Citi do get points for creativity) and Wells Fargo, and the report on Empire Manufacturing Index, which registered a fifth consecutive negative monthly reading, and you've got the making for disappointment and the third "breakout fakeout" seen in the last two months.

But with the earnings parade now rolling along and all kinds of politicians gathering in Europe this week, heaven only knows which way the wind will blow the market next. And with the market back in its trading range, we'll caution that the next time a breakout appears to be occurring, it had best be accompanied by some real buying and strong volume.

Turning to this morning... China's economic growth slipped in the third quarter, Moody's warned that France's AAA rating may be at risk, Germany's ZEW confidence index was very weak and suggests that the country may already be in recession, and the earnings parade provided results from Bank of America, Goldman Sachs, Coca-Cola, Johnson & Johnson, etc. Markest in Asia were hit hard, European markets are lower and U.S. stock futures are pointing to a weak open.

On the Economic front... The Labor Department reported the Producer Price Index (an indication of inflation at the wholesale level) for September rose by +0.8%, which was above the consensus estimate for a gain of +0.3%. When you strip out food and energy, the so-called Core PPI came in at +0.2%, which was also above the consensus for +0.1% and August’s +0.1%.

We'll also get the report on NAHB Housing Market Index at 10:00 am eastern this morning.

Thought for the day... Regardless of the color on the screens, try embracing an "attitude of gratitude" today...

Pre-Game Indicators

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

 

  • Major Foreign Markets:
    • Australia: -2.04%
       
    • Shanghai: -2.33%
       
    • Hong Kong: -4.23%
       
    • Japan: -1.55%
       
    • France: -2.21%
       
    • Germany: -0.92%
       
    • Italy: -0.87%
       
    • Spain: -1.49%
       
    • London: -1.46%

     
  • Crude Oil Futures: -$0.83 to $85.97
     
  • Gold: -$33.50 to $1643.10
     
  • Dollar: higher against the Yen, Euro, and Pound
     
  • 10-Year Bond Yield: Currently trading at 2.112%
     
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -4.90
       
    • Dow Jones Industrial Average: -75
       
    • NASDAQ Composite: -6.58

 

Wall Street Research Summary

Upgrades:

  • PepsiCo (NYSE:PEP) - Argus Research
     
  • VMware (NYSE:VMW) - Added to Conviction Buy at Goldman Sachs
     
  • AK Steel (NYSE:AKS) - Goldman Sachs
     
  • Anadarko Petroleum (NYSE:APC) - Oppenheimer
     
  • Chevron (NYSE:CVX) - Target increased at Oppenheimer
     
  • Cheesecake Factory (NASDAQ:CAKE) - Piper Jaffray

     

    Downgrades:

  • Progressive (NYSE:PGR) - Argus Research
     
  • El Paso (EP) - Argus Research
     
  • Halliburton (NYSE:HAL) - Target cut at Barclays
     
  • IBM (NYSE:IBM) - BMO Capital
     
  • Whirlpool (NYSE:WHR) - Goldman Sachs
     
  • Hasbro (NASDAQ:HAS) - Goldman Sachs
     
  • A123 Systems (AONE) - Goldman Sachs
     
  • US Steel (NYSE:X) - Goldman Sachs
     
  • VMware (VMW) - Jefferies
     
  • Walgreens (WAG) - Jefferies
     
  • Chsapeake Energy (NYSE:CHK) - JPMorgan
     
  • PF Chang's (NASDAQ:PFCB) - Piper Jaffray

     

    Earnings Yesterday's Earnings After The Bell

    Company

    Symbol

    EPS
    Reuters
    Estimate
    Brown & Brown BRO $0.30 $0.31
    IBM IBM $3.28 $3.22
    ICU Medical ICUI $0.65 $0.58
    Packaging Corp PKG $0.43 $0.43
    Steel Dynamics STLD $0.19 $0.21
    Stanley Black & Decker SWK $1.34 $1.33
    VMware VMW $0.53 $0.50

    Today's Earnings Before The Bell

    Company

    Symbol

    EPS
    Reuters
    Estimate
    Bank of America BAC $0.56 * $0.22
    Check Point Software CHKP $0.72 $0.70
    Domino's Pizza DPZ $0.35 $0.33
    EMC EMC $0.37 $0.36
    Forest Labs FRX $0.91 $0.98
    Goldman Sachs GS ($0.84) ($0.02)
    WW Grainger GWW $2.44 $2.33
    Harley-Davidson HOG $0.78 $0.75
    Johnson & Johnson JNJ $1.24 $1.21
    Coca-Cola KO $1.03 $1.02
    Omnicom OMC $0.72 $0.70
    Parker-Hannifin PH $1.93 $1.69
    State Street STT $0.96 $0.88
    UnitedHealth UNH $1.72 $1.12

    * Report includes items that make comparisons to the consensus estimate questionable

    Long positions in stocks mentioned: IBM, VMW, EP

    For more of Mr. Moenning's thoughts and research, visit StateoftheMarkets.com

     


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