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Bounce or New Beginning?

Daily State of the Markets 
Monday Morning – August 30, 2010

Good morning. Although it was one of the last summer Friday's, trading was surprisingly volatile. Despite the fact that most traders were likely working on their short game or vacationing with the family, there was a serious dose of data input to the game on Friday ranging from economic results, corporate guidance, and of course, some very important Fedspeak. The end result was an impressive move up in the indices, which may or may not represent a new beginning for the bull camp.

While the bears could be heard making remarks about short-covering and discussing the height to which a dead cat could actually bounce, the bulls talked about a second successful test of 1040 and a move "into the gap" that was created by Tuesday's opening dive lower. And while no one knows for sure how much farther the bulls can run, it does appear that our heroes in horns were able to wrestle the ball away from their opponents on Friday.

There were three key inputs to the session. First, we had the first revision to the second quarter GDP in the U.S. While down significantly from the initial estimate made earlier in the month (remember, the government's first estimate didn't even include all the data from the final month of the quarter), the growth rate of 1.6% was actually better than the consensus for a rate of 1.3% and the whisper numbers containing a zero-handle. The takeaway from the report was that although the growth has indeed slowed, the economy does continue to grow. And in short, this is what "slowdowns" look and feel like.

The next bit of data was less upbeat as Intel (NASDAQ:INTC) revised its revenue guidance for the third quarter - and not in a good way. Although analysts following the chipmaker suggested that the move wasn't exactly a surprise, the computers that look for key words were able to put "Intel" and "reduced guidance" together in order to create a swift downdraft. It is also interesting to note that the Intel news was released within a couple minutes of the University of Michigan's Confidence index, which, while not a bad report by any stretch, also came in "below consensus." As such, the computers clearly got busy for a period of about 10 minutes Friday morning.

Although things were looking ugly there for a while during the bout of HFT-induced selling as the S&P quickly found itself back at the crucial 1040 level, the contents of Mr. Bernanke's speech (which was released at 10:00 am eastern) gave the bulls a quick lift. While the Fed Chairman didn't really say much of anything new, this fact alone was music to traders' ears. Recall that the last time we heard from Gentle Ben, he had crafted a new phrase to describe the economy, which instantly created uncertainty and worry in the market.

This time around though, Bernanke was more pragmatic with his 17-page summary of the crisis, the Fed's response to date, and the economic outlook as he simply stated the facts without consulting the thesaurus. The bottom line here is the Fed Chairman gave notice that the Fed sees what is happening and stands ready to do more should the economy continue to falter.

The reassurance from arguably the most important figure in economics was enough to get the shorts to run for cover and for aggressive traders to continue to play the bottom-fishing game. However, the question of whether Friday's 165-point gain will be a new beginning or just a bounce in an oversold market remains unanswered.

Turning to this morning... Traders were unimpressed with Japan's decisions in their "emergency meeting" and lower stock prices in Europe are putting pressure on our futures at the moment.

On the economic front... Personal Incomes were rose by +0.2% in July, which was a tenth below the consensus expectations for an increase of +0.3%. June’s reading was unchanged at 0.0%. Personal Spending for the month rose by +0.4, which a tenth ahead of the expectations of +0.3% and June’s unchanged reading. On the inflation front, the PCE Core rose by +1.9 over the past year while the PCE Deflator was unchanged in June.

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: +1.79%
       
    • Shanghai: +1.61%
       
    • Hong Kong: +0.68%
       
    • Japan: +1.76%
       
    • France: -0.43%
       
    • Germany: -0.31%
       
    • London: closed

     

  • Crude Oil Futures: - $0.40 to $74.77
     
  • Gold: + $0.50 to $1238.40
     
  • Dollar: higher against Yen and Euro, lower vs Pound
     
  • 10-Year Bond Yield: Currently trading lower at 2.589%

     

  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -1.4
       
    • Dow Jones Industrial Average: -22
       
    • NASDAQ Composite: -0.89

       

Wall Street Research Summary

Upgrades:

  • Noble Energy (NYSE:NBL) - BMO Capital
     
  • Agrium )AGU) - Target increased at Canaccord Genuity
     
  • Cavium Networks (CAVM) - JMP Securities
     
  • Camelot Information Systems (NYSE:CIS) - Oppenheimver
     
  • Sanofi-Aventis (NASDAQ:SNY) - Societe Generale
     
  • Cerner (NASDAQ:CERN) - ThinkEquity

     

    Downgrades:

  • Abercrombie & Fitch (NYSE:ANF) - Estimates reduced at Cowen
     
  • Lululemon (NASDAQ:LULU) - Jefferies
     
  • Collective Brands (NYSE:PSS) - Soleil Securities
     
  • Texas Instruments (NASDAQ:TXN) - Susquehanna
     
  • Advanced Micro (NASDAQ:AMD) - Estimates reduced Wells Fargo

     

    Long positions in stocks mentioned: NBL

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

     


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Disclosure: NBL