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Less To Stress About?

Daily State of the Markets 
Monday Morning – July 26, 2010

Good morning. We opined on Friday that we just might be seeing some improvement in the overall stock market environment. And with the release of the stress test results from 91 European banks on Friday, we're going to suggest that traders now have one less thing to stress about over the intermediate-term.

While there will undoubtedly be some discussion about the degree of rigor, as well as the consistency of the tests, which were applied by something like 20 different regulators, the simple fact that the European bank stress test results are now public means that another big, bad event has come and gone. And in short, the bulls appear to have held up pretty darn well in the face of everything that's been thrown at them this month.

Consider that at the beginning of the month the general consensus was that (a) the U.S. was headed for a double-dip recession, (b) FinReg would destroy the financials and send the banks into a death spiral (okay, that might be a little harsh - but, you get the idea), (c) the oil spilling into the Gulf wasn't ever going to stop, (d) China was going to cut off its nose to spite its face by clamping down too hard on its economy, and (e) the European debt mess was going to drag the global economy down the drain.

Three weeks later, we now understand that virtually no one really expects the U.S. to dip back into recession anytime soon; FinReg has passed and the banks are still standing; the oil has stopped spewing into the GOM; China is making noise about going easy on their economy; the stress tests weren't half bad; and the economic data out of Europe was actually better than expected last week. Thus, it would seem that none of the worst fears the market was pricing in at the end of June appear to be on the table at the present time.

Does this mean that the HFT boys are done using with their shiny new computer toys to drive stocks lower in the blink of an eye? Does this mean that the economy will reverse course and jobs will begin to grow on trees? Does this mean your home is going to start going up in value again? And does this mean that stocks will march merrily higher from here? In a word, no. However, it does mean that there is a very good chance that the corrective phase that began in late-April is now ending.

To be sure, the bulls will be tested whenever a piece of bad news comes along. But at this stage of the game, the fact that the indices have broken above that 3-month downtrend line and moved back above some important technical levels means that Armageddon might be off the table - at least for a while.

Don't get me wrong, I am NOT suggesting that a new bull leg is about to begin or that the April highs will be taken out anytime soon. However, I do think that unless the big-picture environment worsens, the support in the 1040-1060 is likely to hold up.

Turning to this morning... The pre-game indicators are pointing to a modest pullback at the open as the enthusiasm from the European bank stress tests appears to be waning. Stocks are at a critical juncture technically, so a pause is to be expected.

On the economic front...The Chicago Fed reported that their National Activity Index came in at -0.62 in June, which was below the revised May reading of +0.31 (April’s reading was +0.25). However, the level projects average economic growth at the national level.

Finally, remember that it pays to be open minded (in more ways than one)...

Pre-Game Indicators

Here are the important indicators we review each morning before the opening bell...

  • Major Foreign Markets:
    • Australia: +0.65%
    • Shanghai: +0.65%
    • Hong Kong: +0.12%
    • Japan: +0.77%
    • France: -0.09%
    • Germany: -0.33%
    • London: -0.12%


  • Crude Oil Futures: - $0.88 to $78.10
  • Gold: - $2.00 to $1185.80
  • Dollar: higher against Yen, lower vs. Euro and Pound
  • 10-Year Bond Yield: Currently trading lower at 2.98%


  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -2.64
    • Dow Jones Industrial Average: -16
    • NASDAQ Composite: -3.08


Wall Street Research Summary


  • Schlumberger (NYSE:SLB) - Argus Research
  • Blackstone Group (NYSE:BX) - BofA/Merrill
  • MEMC Electronic Materials (WFR) - Barclays
  • Diamond Offshore (NYSE:DO) - Bernstein
  • Bemis (NYSE:BMS) - Deutsche Bank
  • AT&T (NYSE:T) - Deutsche Bank
  • Kimberly-Clark (NYSE:KMB) - Removed from Conviction Sell List at Goldman
  • Patterson FTI(NASDAQ:PTEN) - Jefferies
  • Scripps Networks (NYSE:SNI) - Morgan Stanley



  • Teva Pharmaceutical (NYSE:TEVA) - Bernsetin
  • ITT Educational (NYSE:ESI) - Deutsche Bank
  • Chico's FAS (NYSE:CHS) - Added to Conviction Sell at Goldman
  • Sanderson Farms (NASDAQ:SAFM) - Morgan Stanley
  • Omnicom (NYSE:OMC) - Morgan Stanley
  • Estee Lauder (NYSE:EL) - Oppenheimer


    Earnings Before The Bell



    Alberto-Culver ACV $0.39 $0.37
    FMC Technologies FTI $0.78 $0.70
    Lorillard LO $1.73 $1.61
    Roper Industries ROP $0.74 $0.74

    Long positions in stocks mentioned: None

    For more "top stock" portfolios and research, visit


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