Daily State of the Markets
Friday Morning – July 9, 2010
Good morning. After three straight days of gains, in which the Dow has tacked on more than 450 points or +4.7%, the question of the day is if the current joyride to the upside is merely a bounce from an oversold condition or an indication that traders are in the process of undoing some of the discounting that occurred during the recent -16% correction.
The bears are of the opinion that this week's blast higher is merely a bounce (of the dead cat variety). Our furry friends remind us that when dropped from a sufficient height, almost all objects will bounce to some degree. In addition, the glass-is-half-empty crowd points out that so far at least, the rebound is following the bounce script. Generally speaking, rebounds from an oversold condition tend to be fast and furious (check), occur on low volume (check), are driven by some piece of good news (check), and tend to flame out in relatively short order.
On the other side of town, our heroes in horns vehemently disagree. The bull camp is busy telling anyone that will listen that the current rally is based on a fundamental change in thinking and as such, has some additional room to run. While we can't agree 100% with the thinking, the bulls argue that (a) the bank stress tests in Europe will be better than expected and will remove a great deal of uncertainty, (b) this week's improvement in jobless claims point to the fact that the jobs market is improving (insert raised eyebrow here), and (c) the economy is merely slowing down and NOT falling off of a cliff.
As I have opined many times over the years, when I find myself in doubt about a fundamental question such as this one, I like to turn to the bond market for answers. You see, the bond market doesn't have to deal with such silly things as earnings, growth rates, or multiples. No, the focal point here is simply the state of the economy and the prospects for inflation. Thus, while we did see a bounce in yields yesterday, it is interesting to note that the yield on the 10-year closed yesterday at 3.02%, which is down dramatically from the 3.99% rate seen on April 5th and the lowest level since April 2009.
In fact, the 10-year had been trading in a range between 3.20% and about 4% for more than a year. Then as fears of the economy slowing faster than anticipated began to take hold over the past two weeks, the 10-year broke down and has not recovered. Thus, from an objective point of view, unless the bond market falls rather dramatically and yields pop back up above 3.2% in the near-term, we'll suggest that the bond market's message is loud and clear: things are slowing down here in the U.S.
Getting back to the stock market, it is also important to note that the downward channel and/or the trendline that has been intact since April 26th, has not been violated. Thus, from an objective standpoint, it appears that unless or until the S&P can break above 1080 on a closing basis or 1100 on an intraday basis, the downtrend remains in play.
So, while the bulls still have the time and space for some additional fun in the summer sun, we're not rushing to jump on the bull bandwagon just yet.
Turning to this morning... We don't have any economic data to review before the bell, but we will get a report on Wholesale Inventories at 10:00 am eastern.
Finally, best of luck on this Friday and be sure to enjoy the weekend!
Here are the important indicators we review each morning before the opening bell...
Major Foreign Markets:
- Australia: +0.93%
- Shanghai: +2.31%
- Hong Kong: +1.64%
- Japan: +0.52%
- France: +0.21%
- Germany: +0.36%
- London: +0.25%
Crude Oil Futures: + $0.21 to $75.23
Gold: + 6.60 to $1202.70
Dollar: lower against Yen, higher vs Euro and Pound
10-Year Bond Yield: Currently trading higher at 3.04%
Stocks Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -3.05
- Dow Jones Industrial Average: -32
- NASDAQ Composite: -3.26
Wall Street Research Summary
- KLA-Tencor (NASDAQ:KLAC) - Credit Suisse
- Corning (NYSE:GLW) - Added to short-term buy list at Deutsche Bank
- Visa (NYSE:V) - Added to Conviction Buy at Goldman Sachs
- Norfolk Southern (NYSE:NSC) - JPMorgan
- Eaton Vance (NYSE:EV) - - JPMorgan
- Janus Capital (NYSE:JNS) - JPMorgan
- Texas Instruments (NYSE:TXN) - Oppenheimer
- BJ's Wholesale Club (BJ) - Target increased at UBS
- Costco (NASDAQ:COST) - UBS
- Ciena (NASDAQ:CIEN) - Target reduced at AURIGA
- Best Buy (NYSE:BBY) - Jefferies
- Canadian National Railway (NYSE:CNI) - JPMorgan
- Atheros Communications (NASDAQ:ATHR) - Oppenheimer
- Intel (NASDAQ:INTC) - Oppenheimer
- Marvell (NASDAQ:MRVL) - Oppenheimer
- Advanced Micro (NASDAQ:AMD) - Oppenheimer
Long positions in stocks mentioned: None
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