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More Than A Bounce?

|Includes: INTC, MOS, NOK, PALM, PowerShares DB USD Bull ETF (UUP)

Daily State of the Markets 
Monday Morning – December 21, 2009

Good morning. They say that all traders are currency traders right now as the key story in the markets remains the bounce in the buck. On Friday, we showed a chart of the dollar, which made the illustrated that the greenback has broken out of the recent downtrend and is threatening to make a further run northward.

The issue here is if the currency of the good ‘ol USofA moves much higher, the risk of further unwinding of the dollar-carry trade increases with each tick as short-covering would surely continue to kick in. And as we’ve mentioned a time or three over the past month, the bears tell us that if this exceptionally crowded trade begins to unwind in a rapid fashion, there could be big trouble for the so-called risk assets – i.e. stocks, commodities, and emerging markets.

Why do we care so much about the movements in the dollar, you ask? Remember, the job of our Daily State of the Markets report isn’t to rehash the news or opine about what we think will happen next; it is to identify the drivers of the current market so that we can understand the reason WHY things are happening. So, regardless of the fact that traders may be selling stocks these days in response to some sophisticated hedge fund strategy and not because of anything even remotely related to fundamentals or the economy, this the hand we’re being dealt right now – so we have to deal with it.

The point is this: If the fate of the stock market rally is tied to the technical action in the dollar, then we’d best make sure we understand what is happening on the charts of the dollar, right? So, let’s take another look at the chart of the dollar this morning – or more accurately, the dollar ETF.

PowerShares US Dollar:

As you can see, the UUP looks like it broke out to the upside in the early going on Friday and then pulled back to close little changed. Technicians will tell us that this is a bearish pattern and as such, the bounce in the buck may be coming to an end. But, as if this weren’t enough fun already, we need to remember that Friday’s price action may have been distorted by the quad-witch options expiration event. And in the case of the UUP, the ETF opened late and there appeared to be some artificial buying on the open. In other words, the high of the day may not have been “real.”

The stock market bulls will point out that both the dollar and the stock market went up on Friday and that traders must have been focusing on the fundies derived from the better-than-expected earnings at both Research in Motion (RIMM) and Oracle Systems (NYSE:ORCL). Our heroes in horns also suggest that stocks overcame a host of bad news including worries about the state of the shopping season, lower foreign markets, ongoing concerns about sovereign debt, and some new fun-and-games on the geopolitical front (Iran and Venezuela).

However, we’d like to point out that the dollar basically opened higher and then did a long-slow fade into the close. And as such, the intraday decline in the dollar may have helped stocks move to the upside throughout the day.

Cutting to the chase, the key here looks to be the question of if the dollar rally has been a bounce up off of the bottom in response to a flight to quality tied to the sovereign debt problems, or a more meaningful rally that is just getting started. Now toss in the holiday-shortened week where most traders are at home and it looks like we’ll just have to wait and see if Santa will actually show up at the corner of Broad and Wall this year.

Turning to this morning, it is a fairly quiet morning to start what is expected to be a fairly quiet week. the Chicago Fed National Activity Index for November was reported at -0.32, which was a modest improvement from the revised October reading of -1.02 (revised from -1.08).

 

Running through the rest of the pre-game indicators, with the exceptions of Australia and Hong Kong, the overseas markets are higher. Crude futures are up with the latest quote showing oil trading up $0.12 to $73.48. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.60%, while the yield on the 3-month T-Bill is currently at 0.04%. In addition, gold is moving higher by $5.20 and the dollar is lower against the Yen and Euro, but up versus the Pound. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to the possible arrival of Santa. The Dow futures are currently ahead by about 46 points; the S&P’s are up about 5 points, while the NASDAQ looks to be about 11 points above fair value at the moment.

Earnings Before The Bell
 

Company

Symbol

EPS
Reuters
Estimate
ConAgra CAG $0.52 $0.47
Walgreens WAG $0.49 $0.48

Wall Street Research Summary

Upgrades:

  • Intel (NASDAQ:INTC) - Barclays
     
  • Mosaic (NYSE:MOS) – Goldman Sachs
     
  • Potash (POT) – Added to Conviction Buy at Goldman Sachs
     
  • CVS Caremark (NYSE:CVS) – Mentioned positively at Goldman
     
  • Express Scripts (NASDAQ:ESRX) – Mentioned positively at Goldman
     
  • Palm (PALM) – Macquarie Research, Morgan Joseph
     
  • Alcoa (NYSE:AA) – Morgan Stanley
     
  • Seagate Technology (NASDAQ:STX) – RW Baird

     

    Downgrades:

  • Nokia (NYSE:NOK) – Debt downgraded at Fitch
     
  • Air Products (NYSE:APD) – Removed from Conviction Buy at Goldman
     
  • Genzyme (GENZ) – Morgan Stanley
     
  • Dominion (NYSE:D) – Wells Fargo

     

    Long positions in stocks mentioned: none

    Try doing something nice for someone today (for no reason at all) and until next time, “may the bulls be with you!”

    David D. Moenning
    Founder TopStockPortfolios.com

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

     


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