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Nothing But Darkness?

Daily State of the Markets 
Tuesday Morning – August 31, 2010

Good morning. It would be easy to brush aside the drubbing in the stock market seen on Monday as there were signs of program trading, London banks were closed, and the session wound up producing the lowest volume of the year. (In fact, the four lowest volume days this year have come on the Monday's in August.) So, to say there was no one home is a bit of an understatement.

However, the end result from a chart standpoint was just plain ugly with the majority of Friday's bounce being erased and the small caps, semis, and banks really taking it on the chin. And while the bulls may have came into Monday with some hope for a reprieve from the negativity, they went home with their tails between their legs.

The problem here is simple - a pervasive negative outlook has taken over the market. The steady stream of M&A activity that has cropped up lately (usually a good thing)? Ignored. The upbeat data contained in the GDP Report? A fluke. Decent results on Consumer Spending? Who cares! Everybody now seems to be of the mind that, regardless of what economists tell them, the economy is heading into the tank.

Don't believe me? Feel free to conduct your own unscientific survey. Go out and ask 10 people what they think about the outlook for the economy and the stock market. The answers and the negativity might surprise you.

However, as Ned Davis once said, "Something that everyone knows isn't worth knowing." The point here is that by the time everybody on the planet is of the same opinion, the resulting action in the stock market has already taken place. In other words, when everybody is openly negative, the selling (i.e. the discounting of the future) has probably been done.

The excuse du jour for the selling on Monday was the idea that the abundance of data coming out this week (PMI's, Home Price Index, Consumer Confidence, ADP Employment, Construction Spending, ISM Manufacturing and Non-manufacturing, US Productivity, Initial Jobless Claims, Factory Orders, Pending Home Sales, and Nonfarm Payrolls) is all going to be bad - very bad. Apparently the crystal balls used by the traders at their desks on Monday produced nothing but darkness for the future.

But then again, perhaps the programs that were obviously in control of the action decided that the path of least resistance was lower. After all, there was some resistance overhead and nobody around to take the other side of the trade. After all, most everybody expected some sort of a pullback after Friday's romp higher. But regardless of your view on the reason behind Monday's tank job, the bulls once again find themselves staring at a very important line in the sand at S&P 1040.

Turning to this morning... The doom and gloom regarding the economic outlook continues to prevail in the foreign markets and the pre-game indicators are pointing lower. Thus, it would appear that another test of 1040 is at hand.

On the economic front... All the data comes out after the bell this morning. Look for teh Chicago PMI at 9:45 am eastern, August Consumer Confidence at 10:00 am, and the minutes from the latest FOMC meeting will be released at 2:00 pm.

Finally, we wish you all the best for a productive and enjoyable day...

Pre-Game Indicators

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

  • Major Foreign Markets:
    • Australia: -0.99%
    • Shanghai: -0.52%
    • Hong Kong: -0.97%
    • Japan: -3.55%
    • France: -1.13%
    • Germany: -0.94%
    • London: -0.94%


  • Crude Oil Futures: - $1.02 to $73.68
  • Gold: $1.50 to $1237.70
  • Dollar: higher against Yen and Pound, lower vs Euro
  • 10-Year Bond Yield: Currently trading lower at 2.488%


  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -7.37
    • Dow Jones Industrial Average: -54
    • NASDAQ Composite: -9.77


Wall Street Research Summary


  • Rio Tinto (RTP) - BofA/Merrill
  • Abercrombie & Fitch (NYSE:ANF) - BMO Capital
  • Eastman Chemical (NYSE:EMN) - Added to Short-term Buy at Deutsche Bank
  • Comerica (NYSE:CMA) - RW Baird



  • ArcSight (OTCPK:ARST) - Morgan Stanley
  • CPL Energia (NYSE:CPL) - UBS


    Long positions in stocks mentioned: none

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