Daily State of the Markets
Good morning. I'm guessing that many investors were likely left scratching their heads on Friday. After six straight down days, during which time the sentiment toward the global macro view went from bad to worse, an impressive blast higher occurred on Friday. Out of nowhere and on no news to speak of, the Dow surged 204 points. The move erased fully four days of losses in a single session (with the majority of the rally coming in the first 35 minutes Friday morning) and the indices even managed to finish the week in the plus column. And for those keeping score at home, the S&P 500 is now just 4.5% off of its high water mark for the current bull market cycle, which began on March 9, 2009.
So what gives? Why did traders suddenly put away their fear of what might happen in Europe, how far the global economy might fall, what the economic slowdown will do to earnings, and what the Liebor/JPM/PFG/BLS scandals might do to the trust of those few remaining individual investors in the game?
In order to push the DJIA up more than 200 points, there is usually some event (think EU Summit, Fed move, or important economic report) that acts as a trigger. But in this case, all traders had to work with was word that Italy's sovereign debt rating had been downgraded, a report showing that China's GDP continued to slow (to the weakest rates since Q1 2009), JPMorgan's (NYSE:JPM) earnings report (which confirmed that the bank's losses weren't horrific), a PPI report that suggested the Fed does not have a green light for more QE, and the weakest consumer sentiment number (courtesy of the University of Michigan) of the year.
In short, although the Italian bond auction wasn't bad, there was no single news item that told traders and/or their computers to "Buy 'em!" And while some analysts argued that Friday's joyride to the upside represented a sigh of relief rally in response to the fact that JPM's numbers weren't worse and that China's GDP wasn't falling off a cliff, I believe there was more at work in the market Friday.
Yes, it was a summer Friday, so yes, volume was thin. Yes, there was CLEARLY a large amount of short-covering involved. And yes, the algo's were once again in charge (they usually are). However, I believe it was really the fear of missing out on the next big trade that was behind the move.
Starting on Wednesday of last week, I began suggesting to colleagues that the market had actually "acted" reasonably well in the face of the negative macro picture. On Thursday I even asked readers of my morning market missive to consider a question or three by writing, "With all the bad news, the scandals, the crises, and the HFT-driven market volatility, why then is the S&P 500 just 5.5% from it high water mark for this bull market cycle? If the sky is really falling, why aren't stocks lower? Why is the S&P's weekly chart still in an uptrend? And why has the last hour of the trading day been up in nine of the last ten sessions?"
My point was that it seemed odd to me that stocks hadn't been hit harder over the prior six sessions. Sure, the market was down six days in a row, but the damage really wasn't all that bad. Thus, I opined that traders were buying the dips on an intraday basis because nobody wants to miss out on the next big QE-induced "risk on" trade. Remember, by now everybody on the planet knows how to put on the "risk on" trade (to review, you go long stocks, emerging markets, oil, copper, gold, commodity indices, junk bonds and commodity-based currencies, and then short the dollar and bonds), so my guess is that traders simply don't want to miss out on what could very well be the biggest trade of the year.
If the last three summers of discontent has taught traders anything it is that these periods of market mayhem do eventually come to an end - and usually with the idea that the Bernanke cavalry (which includes the central bankers of the world these days) is planning to ride to the market's rescue again. So, stocks reacted positively when the whispers that the PBOC (People's Bank of China) might cut rates again over the weekend. And then when Atlanta Fed President Dennis Lockhart (who is a voting member of the FOMC this year) told an audience on Friday that the "another policy decision looms" and that the FOMC could indeed take further action before the current round of Operation Twist ends, well, fear of missing out took over.
Does this mean that the problems in Europe are solved? Does this mean that the global economy will suddenly improve? Does this mean that the scandals on Wall Street will come to an end? Uh, no. But what it does mean is that if another round of QE is announced (or even hinted at), traders are going to buy what has worked the last three times and push "risk assets" higher. You can count on it.
How long the next QE rally will last is anybody's guess and I'm going to suggest that the law of marginal disutility may come into play if and when Bernanke drops the rope on another round of bond buying. In addition, nobody really knows if more bond buying will actually help the economy. But from my perch, one thing is for sure... nobody wants to miss out on the next big QE-induced "risk on" trade.
Turning to this morning... Stock futures are pointing to a softer open this morning as China did not cut rates, the situation in Europe is getting messier by the minute, and U.S. traders are waiting on earnings from Citi as well as a couple big economic reports. Also note that this is an options expiration week and that Ben Bernanke is testifying on Capitol Hill.
On the Economic front... We'll get Retail Sales, Empire Manufacturing and Business Inventories today.
Thought for the day... If you shoot for the stars & hit the moon, it's OK. You've got to shoot for something. -Confucius
Here are the Pre-Market indicators we review each morning before the opening bell...
Positions in stocks mentioned: none
Follow Me on Twitter: @StateDave
For more of Mr. Moenning's thoughts and research, visit StateoftheMarkets.com
The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.
Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.
The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.
The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (NASDAQ:HCM) a Chicago-based money management firm. HCM is registered with the U.S. Securities and Exchange Commission as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.
Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.
Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.