Tuesday, November 30, 2010

Sovereign Debt Concerns Continue To Dominate The Action

The market rebounded nicely from its lows yesterday, but sellers are back this morning amid continued concerns about sovereign debt in Europe. The concerns have led to continued selling in the euro, and buying in the dollar.

The flight to safety trade is on, with the dollar higher, gold prices higher ($1383), and Treasury bonds higher also. At the same time, global equities and commodities are lower.

Asian markets were down across the board overnight, amid ongoing speculation about tighter monetary policy in China.

There was some good economic news in the form of a higher than expected Consumer Confidence reading this morning. Consumer Confidence for November rose to 54.1 from 49.9 the prior month.

Oil prices are lower, but still above $85 after yesterday's rally; the 10-year yield has fallen back to 2.77%; and the volatility index (VIX) is up +5% to 22.67 after a big reversal yesterday from its intraday highs.

Trading comment: The market continues to bend, but not break. The chart of the S&P 500 below shows that the market has been finding support at its 50-day average (blue line). Reversing from its lows yesterday to rally into the close was also bullish action.

So far the SPX remains 3-4% off its early November highs, so this correction has been mild in magnitude and is approaching its 4th week in duration. I said before that I wanted to see bearish sentiment surface, and the put/call ratios have begun to confirm that. The CBOE put/call ratio hit 0.98 yesterday and 0.96 this morning, while the ISEE call/put sank to 87 yesterday and 78 this morning. So that is a start. It will be interesting to see if the investment advisor sentiment surveys change much this week.

Monday, November 29, 2010

Monday Morning Musings

News over the weekend of a bailout for Ireland has done little to calm the markets this morning. The $113 billion bailout is also weighing on the Euro and leading to a rally in the dollar. And as we know lately, strong dollar means weak stocks.

There are also continued tensions regarding the Korean situation, but despite those Asian markets finished mixed overnight. European markets are lower this morning, and the credit default swaps on major sovereign debt continue to push higher.

Among the sector ETFs, it is a big odd that financials (XLF) are bucking the weakness and trading slightly higher on the day. I think this shows a bit too much complacency in the face of this big debt mess in Europe. Healthcare (XLV) stocks are down the most, as a group.

The early numbers for Black Friday look pretty good. So far, Amazon (AMZN) is trading higher. I heard the retail figures for Thanksgiving day were also pretty good. And today we have Cyber Monday, which I'm sure will be heavily discussed later this week.

Oil prices are slightly higher to $84.05, while gold prices are off a bit to $1361. The flight to safety into Treasuries is pushing the yield on the 10-year Note down to 2.83%. And the volatility index (VIX) is up +4.5% today to a 2-month high of 23.22.

Trading comment: I have mentioned recently that I wanted to see how sentiment shaped up to help gauge when this correction might run its course. So far, I would have to say that I think investor sentiment remains too complacent.

Last week's put/call ratios were on the low side. Additionally, the investor sentiment surveys still show a lot of bullishness. The spread between bulls and bears in the AAII survey rose to +23 last week, while the II survey still hovered at +34. And the Rydex nova/ursa ratio hit fresh highs last week.

So far the S&P 500 is roughly 4% off its early November high. But given that I still think we have room to see these sentiment indicators move lower, I don't think the markets are ready to bottom yet and resume their rally. I expect continued choppy trading, but think the market will likely touch lower levels in order to bring out more bearishness before we see a meaningful bounce. And much also depends on this situation out of Europe, as we need to see the bad news slow down.

Friday, November 26, 2010

Market Finds Plenty To Worry About On Black Friday

Stocks opened lower this morning on a combination of concerns. Asian markets were lower overnight amid escalating tensions on the Korean Peninsula. There was also news out of Beijing that China is going to cut its loan targets in an effort to cool property prices.

European markets are also lower on continued concerns over sovereign debt issues in Europe. Portugal is said to be under pressure from other euro countries and the EU to accept an aid package, but officials deny they need one. Of course, that's the same thing Ireland and Greece said at the outset. I suspect next we will start to hear Spain mentioned in the discussions.

The dollar is bouncing on all of this news, as a safe haven, and this is weighing on the commodity complex. Gold prices are down $18 to $1354, while oil is down less than that to $83.50.

The 10-year yield is lower today to 2.86%; and the volatility index (VIX) is bouncing +6.5% from Wednesday's levels to 20.85.

Trading comment: Today is a holiday shortened session, so volume will be very light, and I wouldn't put too much emphasis on today's trading. Interestingly, many leading growth stocks are bucking the weakness and grinding higher. To wit, check out FFIV, ROVI, OPEN, APKT, IGTE, NFLX, CMG, and AAPL. These stocks have proven very resilient and shown the ability to quickly brush off any negative news and continue higher despite the overall market.


Wednesday, November 24, 2010

Stocks Show Continued Resilience And Bounce

The market continues to show its resilience and bounce sharply from yesterday's selloff. Recently, each time the market has experienced a big selloff, it has bounced back quickly. This is a positive trait to a consolidation, whereby the market bends but does not break.

I have been out the last couple of days, but a cursory look at the charts of many leading stocks shows continued positive price action. I think this bodes well to a constructive outlook.

This morning, there were mixed economic reports, but the market seems to be focusing on the positives. November Consumer Sentiment came in better than expected at 71.6, which is up nicely from last month. And initial jobless claims fell to a 2-year low on a better than expected report. A weak durable goods number, and a weak new home sales report don't seem to be gaining too much traction in early trading.

Asian markets were mixed overnight. The euro is bouncing a bit this morning, but wider yield spreads in Europe show that concern about debt issues remain. The dollar is roughly flat, with oil and gold prices higher. Oil is up to $81.67, while gold has bounced back to $1376. Gold prices recently found solid support at their 50-day average.

Among the sector ETFs, industrials are leading (+1.33%), followed by materials (+1.15%). Utilities (+0.32%) are lagging, followed by consumer staples (+0.46%).

The 10-year yield is bouncing to 2.88%; while the volatility index (VIX) is down a sharp -8.6% back below the 20 level to 18.85.

Trading comment: I think the price action has been constructive. I haven't had a chance yet to see how investor sentiment has been shaping up, so I still need to do that roundup. I will try to post a sentiment update on Friday to update readers. But as I mentioned before, many leading stocks continue to break out to new highs, or hold just below their 52-week highs.

If you look at the chart below, you'll see the S&P 500 has held above its 50-day average, and has been oscillating between its 50-day support and overhead 20-day average. I think this consolidation will soon be broken to the upside, based on the action I am seeing in individual stocks.

Monday, November 22, 2010

Scheduling Conflict - We will be back on Wednesday

Wednesday, November 17, 2010

How Strong Will The Bounce Be?

Stocks are higher in early trading after yesterday's sharp selloff. The culprits for yesterday's decline haven't really gone away, but for now the focus has softened.

China announced price control guidelines, which could take some steam out of the commodity sail. And Ireland's Finance Minister confirmed they are in talks with the EU, ECB, and IMF. But the country remains hesitant to accept aid for its fiscal troubles so far.

Asian markets were mostly lower overnight, with China down another -1.9%. Europe was mixed this morning. The dollar is down a little today, helping gold bounce a little to $1341, while oil slides a bit more to $81.62.

The 10-year yield is down today to 2.81%; and the VIX is giving back -6% to 21.22 after yesterday's sharp spike higher.

Trading comment: Today's bounce looks tepid so far, but it is still early. The market has gotten oversold again, so a bounce should be expected. But I don't expect it to change the near-term trend overnight. I think it is more likely that after the market gets an oversold bounce, that there is another wave down which should produce a better buying opportunity.

The put/call ratios were not has high as I would have liked to see yesterday given the magnitude of the selloff. We need to see investor complacency get shaken up to help the market bottom and continue to climb the wall of worry.

I did a little buying yesterday, as I like to average in. You are never going to time the bottom perfectly, so it is better to put your money to work in stages. I'll wait for another down leg before putting more money to work. Patience.

Tuesday, November 16, 2010

Quick Look: Dollar Up, Stocks & Commodities Down

The market is under heavy selling pressure this morning, following lingering concerns over European sovereign debt as well as interest rate hikes in Asia. Greece is in the news again as there is debate about the Greek funding situation, as some members of the EU don't think Greece is doing enough to address its problems.

Asian markets were down overnight, after Korea raised interest rates to 2.5%. This stoked fears that China will tighten rates further as well. The dollar is higher on the weak euro, and this combined with fears of China slowing is hitting commodities pretty hard. Gold prices are back down to $1350 and oil has pulled back to $83.10.

The 10-year yield is up again to 2.94%. This has to bug the Fed. And the VIX is surging +11.1% to 22.45, back above its 50-day average.

One bright spot its Urban Outfitters (URBN), which we added last week. The company reported in-line earnings, but the stock had already pulled back so much that it is spiking higher today, +11% so far this morning. Not bad.

Trading comment: This is why I always say to keep some powder dry. You never know how long a selloff will last, or how far it will pullback. Volume today will be key, to see how much selling pressure there is. I also will be monitoring the put/call ratios to see if there is a jump in bearish sentiment.

Technically, the major indexes have broken their 20-day averages, but are not yet at support at their 50-days. I think most stocks will pull back to their respective 50-days, so I want to be patient and wait for those levels to buy into.

long URBN

Monday, November 15, 2010

Merger Monday

I don't know of a better feeling for an investor than waking up on a Monday morning and seeing that one of your stocks got a buyout offer over the weekend. That's how I felt this morning when I saw that Isilon (ISLN) was being bought for a 30% premium by EMC. Bucyrus (BUCY) is also being bought for a 30% premium by CAT, but I don't own any of that one.

In economic news, advance retail sales for October rose 1.2%, much stronger than the 0.7% expected increase.

The dollar is up slightly, mostly due to the drop in the Euro amid continued sovereign debt concerns. The Portugal finance minister made comments that they are at high risk of needing a bailout. Asian markets were mostly higher overnight.

Among the sector ETFs, financials are strongest (+1.20%), followed by industrials (+0.65%). Materials are the weakest, along with energy. Both are roughly flat to slightly down in early trading.

The 10-year yield is higher again to 2.85%; and the VIX is down -3.9% to 19.80.

Trading comment: The market is slightly higher this morning, but Internet stocks are standing out as laggards. Moreover, leading stocks like Akamai (AKAM) are breaking down below their 50-day averages. This would be a change in character for the market if more stocks followed AKAM's lead and began to break down. So how these stocks hold up should be a key "tell" for the market.

Overall, the major indexes showed a couple of distribution days last week, but are still above their 20-day moving averages. If we break below these levels, then I would look for support to come in at the 50-day averages. That means overall, we could be looking at a 3-5% pullback from the highs, which would not be a big deal and could be construed as healthy longer-term.

long ISLN

Friday, November 12, 2010

China Corrects In A Big Way

The market is pulling back again today, led by big declines in Asia overnight and a continued correction in commodities after their big run. China was down the most overnight, declining 5.2% on profit taking over concern that China's central bank may have to raise rates more to fend off inflation.

This led to further selling in other Asian markets, and Europe is lower this morning also. The dollar is a bit weaker today, but that isn't helping oil and gold, both of which are lower. Oil prices are near $86.35 and gold has pulled back to $1388.

There isn't all that much in the way of market moving news here in the U.S. The G20 is meeting, but so far there have been few headlines crossing the wires.

Today is the first day of the Fed's new QE2 program, but I'm hearing their buying has been delayed due to technical issues. For its part, the 10-year yield is climbing to 2.68%. It will be interesting to see if longer-term yields continue to rise in the face of the Fed buying.

Trading comment: The market is finally pulling back a bit, and I want to start doing a little buying. The S&P 500 is approaching 1200, which would represent a 2% pullback from its highs. Leading stocks continue to hold up well, and that is where I will look to add exposure.

There are some yellow flags popping up, like rising investor bullishness and low put/call ratios, but they haven't turned to red flags yet. I still think after some pause/consolidation, the market will have another move to the upside into year-end.

Wednesday, November 10, 2010

Quote of the Day

"Think big and don't listen to people who tell you it can't be done. Life's too short to think small."
— Tim Ferriss: Author, entrepreneur, and public speaker

Is This More Than Just Another 2-Day Pullback?

The market is lower in early trading, after a reversal yesterday that saw stocks give back their early gains and finished in the red. Volume rose on the exchanges yesterday, making for a distribution day that we haven't seen in some weeks.

The big questions is whether this is just another 2-3 day pullback, or the start of something bigger? It's hard to say, but I still think there are too many buyers out there who are anxious to buy the dip and try to book additional gains into year end. So while we could see some consolidation that lasts for a bit, I don't see the conditions that would point to a larger slide.

Financials are holding up the best so far, with many bank stocks on my screen bucking the weakness (C, BAC, JPM, V). Materials stocks are down the most so far, after a big run in recent days. REITs (IYR) are also bucking the weakness, up 1% so far after yesterday's shellacking.

Asian markets were mixed overnight, while Europe is lower this morning. Wider yield spreads on some Euro nations (Ireland, Portugal, Spain) points to continued concern about sovereign debt, which may be a topic for the G-20 which starts tomorrow.

The pressure on the euro is boosting the dollar, and weighing on commodities. Gold prices have fallen back to $1392, while oil is back near $86.68.

Jobless claims fell 24,000 last week, which was better than expected. The economic news flow remains relatively light.

There was also a somewhat weak 10-year Treasury bond auction yesterday that caused a big spike higher in yields. The 10-year yield is higher again today, now up to 2.72%. Today we will see how the 30-year auction goes.

The VIX is up +2.6%, but still only back to modest levels at 19.60.

Trading comment: Given that the market has not had much of any pullbacks recently, I will likely look to do at least a little bit of buying today. My goal will be to look for those stocks that had strong positive reactions to earnings, and have pulled back since. Those are the best candidates for further rallies into year end after they get some rest. So big picture I am just looking for a pause that refreshes.

long BAC, V

Tuesday, November 09, 2010

Stocks Hold On To Recent Gains

After a six session rise, the S&P 500 gave back a whopping 2 points yesterday. Today, the major indexes are all slightly positive in early trading.

There is not a lot of market moving news. There was an acquisition in the energy space, with Chevron (CVX) acquiring Atlas Energy (ATLS) for $43.34, a 37% premium. The news has the energy sector up +0.93%, leading all other sectors. Financials are down the most so far, with a -0.58% decline.

The dollar is a bit lower today, and that is helping the commodity run continue. Oil prices are now up to $87.35, and gold has pushed further into new high territory by passing the $1400 level (currently $1420). Gold investors seem to be asking how high is high? But with every country trying to devalue their currencies to boost export demand, it still seems premature to try to answer that question.

Asian markets were mostly lower overnight; the 10-year yield is up a touch to 2.57%; and the volatility index (VIX) is testing recent lows below the 18 level.

Trading comment: More of the same. AAPL and GOOG continue to churn higher. Priceline (PCLN) reported great numbers and is up 10%. And the last cloud stock to sort of recover, VMWare (VMW) looks to be trying to recapture is overhead 50-day. So growth stocks continue to lead the market, but sector rotation hasn't left out other leaders from retail to restaurants to basic material stocks (CAT, DE, FLR, etc). So basically the mantra has been follow the leaders, don't bottom fish in the laggards.


Monday, November 08, 2010

Can Stocks Make It Six Weeks In A Row?

The market finished another strong week last week by rising another 3.6%. That marks the fifth straight weekly advance for the broader market, a fairly rare feat. Although I can find a few instances of longer streaks on my tracking spreadsheet, it is still not that common, so if I had to guess I would expect a flat to down week ahead.

Today, there is no news flow to speak of, and that will likely leave the focus on the dollar. As I have said lately, the market regularly trades inversely to the dollar these days, so on a day like today when the dollar is up, we can expect stocks to be weak.

The euro is also very weak this morning, and commodities are down a bit as well. Oil is lower to $86.25 while gold is down near $1388.

Among the sector ETFs, technology (-0.04%) is holding up the best. Most of the tech stocks on my screen are actually in positive territory, as is the NDX right now. Consumer discretionary (-0.77%) and financials (-0.71%) are down the most so far.

Asian markets were mostly higher overnight, while Europe is slightly lower today; the 10-year yield is lower to 2.51%; and the VIX is up +4.3% today to 19.06 after hitting 6-month lows last week.

Trading comment: The bears are probably reloading this morning, hoping for that elusive pullback. It has been a frustrating market for them, but my sense is that underinvested portfolio managers are still looking to put money to work on any dips, and that is why said pullbacks have been so fleeting.

Unless some news comes out to shake their confidence, I see that trend continuing. Credit default swap prices on European sovereign debt have been rising lately, so that is one yellow flag to watch. But with a strong earnings season behind us, new quantitative easing, and economic data seemingly improving (last week's jobs report and ECRI index), it seems like we are going to just see more of the same into year end.

Friday, November 05, 2010

Jobs Report Much Better Than Expected

The market is pushing further to new highs, after breaking out above Aprils highs yesterday. Investors seem emboldened by the combination of gridlock in Washington, new quantitative easing by the Fed, and comments by the President yesterday that he is willing to discuss keeping the Bush tax cuts from expiring.

This morning, the big economic number was the October nonfarm payrolls report, which came in much better than expected. The economy added 151,000 payrolls last month, far more than the consensus estimates for 60,000. Additionally, private payrolls grew by 159,000, the most since April. The unemployment rate held steady at 9.6%.

One theory is that since slashing headcount after the 2008 recession, business have squeezed as much as they can out of productivity increases, and now need to start to adding employees to grow their businesses.

For the second day, financials (+2.46%) are leading the way after news came out yesterday that better capitalized banks may soon be given the freedom to raise dividends and reinstate share buybacks. Defensive consumer staples and healthcare are lagging.

Asian markets rose overnight; the dollar is up a bit today, holding oil and gold flat near $86.50 and $1382, respectively. Gold prices rose sharply yesterday after the Fed news.

The 10-year yield is bouncing a little to 2.52%; and the VIX is down again to new multi-month lows at 17.97.

Trading comment: I was wrong about the sell the news reaction, so I have more cash on hand than I would like. I often talk about not wanting to chase stocks higher, but it seems that each and every market dip is being quickly snapped up by underinvested portfolio managers. As such, I would look to use any near-term weakness to do some additional buying, while keeping some reserves in case we get a deeper pullback. Tough game.

Thursday, November 04, 2010

Obama Shifts And Says Willing To Consider Extending Bush Tax Cuts

Dude, where's my selloff?? That's the first thing I thought when I saw the market rallying this morning. That is why it always makes more sense to listen to what the market is telling you, and not let your opinions get in the way of making money.

Although I was looking for a "sell the news" reaction to the Elections and FOMC announcement, I didn't make a big bet on it. I raised a little cash to take advantage of a pullback, but I held on to our positions in leading stocks. So today we are still in good shape, even as I will have to wait a little longer for that pullback.

The market is up nicely on the heels of the announcement that the Fed will buy $600 billion in Treasury securities until mid-2011. The S&P 500 has rallied right up to its April highs this morning, while the Nazz has broken to new highs for the year.

Additionally, news just came out that Obama is now willing to consider extending the Bush tax cuts for all income levels. This is a big shift, and would be a big positive for investors and the market. Stocks picked up steam on the news, and now the big question will be can we hold on to these outsized early gains into the close. Still a lot of time left before the closing bell.

The dollar is lower on the quantitative easing news, falling to new 11-month lows. But we know lately that dollar weakness is bullish for stocks. Commodities are also rallying to new 2-year highs, with oil prices up to $86.30 and gold higher to $1377.

Asian markets were higher across the board overnight; the 10-year yield is falling to 2.46%; and the VIX is near its recent lows, down -6.75% to 18.25.

Wednesday, November 03, 2010

Everything You Wanted To Know About Quantitative Easing (QE)

As I suspected, the Election news appears mostly priced into the market at current levels, as evidenced by the lackluster reaction in the markets this morning. But today's FOMC announcement could bring a pickup in activity, which I believe has a better chance of leading to some profit taking. But we shall see. Apropos of today's FOMC announcement, below is a copy of an article I received today which sums up the issue the Fed faces:

Q&A on QE2: What a Fed Move Would Mean
The Federal Reserve is expected to announce a new round of bond-buying today to lower long-term interest rates to boost the economy.

Debate is raging inside and outside the Fed about how much good it will do, if any. Proponents say purchasing hundreds of billions of dollars more in Treasury bonds will provide only modest support for the economy. Foes warn that it could backfire by pushing up commodity prices, sowing seeds of unwelcome inflation in the future, or by undermining confidence in the Fed’s ability to manage — and eventually reduce — its holdings.

Ahead of the Fed’s 2:15 p.m. announcement, here’s a rundown of the key issues:

What is quantitative easing, or QE?

It’s the electronic equivalent of starting up the Fed’s printing presses to create money for buying financial assets in the market – in this case long-term U.S. Treasury bonds. Buying bonds pushes down their yields, and the interest rates across the debt markets that are closely tied to U.S. Treasury rates.

How does the Fed expect QE2, as it has been dubbed, to influence the economy?

Lower borrowing costs should help some homeowners refinance, even if many others don’t qualify because of weak credit scores or diminished home equity. It also should help businesses that can qualify for loans through cheaper credit, though larger corporations already can access money at cheap rates. (One big question: will all the new liquidity will lead banks to lend more? They’re already sitting on more than $1 trillion of reserves without lending it out.) The Fed figures that buying up government debt, in theory, should push investors into riskier assets — such as stocks and corporate bonds — and raise their value. It also will tend to weaker the dollar, helping U.S. exporters be more competitive in overseas markets.

What did the first round of QE accomplish?

From December 2008 to March 2010, the Fed bought $1.7 trillion of Treasurys and mortgage-backed securities. The move is widely credited with helping to pull the economy out of a freefall by lowering the yields on those securities, pushing down the interest rates for consumer, mortgage and business borrowing. New York Fed economists have estimated that the purchases lowered longer-term Treasury yields by about half a percentage point, an effect they say translated into lower rates across private credit markets and higher asset prices.

Why is the Fed planning another round of QE?

Even though the Fed has been holding short-term interest rates near zero since December 2008, the economy remains weak. The Fed is falling short on its two primary mandates: unemployment, at 9.6%, is well above “maximum sustainable employment” and inflation is running below what the Fed considers to be “price stability,” an informal target of 1.75% to 2%. Fed officials believe more bond-buying could push rates even lower, though they admit the effect may not be as pronounced as it was before. “The impact of securities purchases may depend to some extent on the state of financial markets and the economy,” Fed Chairman Ben Bernanke said in late August. “For example, such purchases seem likely to have their largest effects during periods of economic and financial stress, when markets are less liquid and term premiums are unusually high.”

How is QE2 different from the first round ?

The Fed’s first round of QE was designed around a clear target amount. It first announced a purchase of up to $600 billion in assets in November 2008 and expanded that goal in March 2009 to $1.7 trillion of Treasury debt, mortgage-backed securities and debt backed by government-sponsored enterprises such as Fannie Mae and Freddie Mac. The “shock and awe” announcement, during the depths of the financial crisis, and the markets’ response before the Fed actually made its purchases helped stabilize the economy. Now, with the economy expanding slowly (but expanding), the Fed is expected to proceed with purchasing assets at a measured pace, which it may adjust as economic conditions change. And this time the Fed is only buying Treasurys, in part because some officials had misgivings about targeting a particular sector of the economy by purchasing mortgage-backed securities and in part because the first round of purchases successfully shrunk an unusually wide gap between the rates on U.S. Treasurys and rates on mortgages.

How much could the Fed ultimately buy?

Most economists expect the Fed to buy $500 billion to $1 trillion, at a pace of about $250 billion or so a quarter. Some forecast the Fed ultimately will buy $1.5 trillion to $2 trillion worth of Treasurys to spur growth. There’s no legal limit to doing more, but the Fed would face some operational and technical challenges if it were to buy many trillions of dollars in additional securities. Among them: Buying several trillion dollars would be more debt than the U.S. government is actually issuing each year.

What are the risks?

No one, inside or outside the Fed, knows the precise effects, or the unintended consequences, of more bond-buying. Giving investors incentives to seek higher yields in riskier assets raises the likelihood of creating asset-price bubbles. The low rates of 2003-04 are believed by some analysts to be a major factor in creating the housing bubble, though Fed Chairman Ben Bernanke doesn’t think so. At some point – well before the economy has completely recovered — the Fed will need to withdraw all the money it’s printing now in order to avoid a surge in inflation down the road. Some investors don’t believe the Fed will be able to do that quickly enough, and fear inflation will result.

What effect would QE have on the dollar and overseas economies?

Printing more money tends to push down the value of the dollar. While that would tend to help U.S. exports, it also risks pushing up the price of oil and other commodities, threatening an inflation surge that could be difficult to stop if the economy picks up. The dollar already has fallen substantially, and the resulting flood of money to emerging markets with higher interest rates and more robust growth is pushing up their currencies more than some of their governments want. That has led some countries to intervene to resist the rise in their currencies, sparking tensions between the U.S. and emerging markets and talk of “a currency war.”

What else could the Fed do if the economy doesn’t pick up?

If QE2 shows even modest success in pushing interest rates down, the Fed could buy more. Central banks elsewhere have purchased corporate bonds, but the Fed says the law prohibits it from doing so except in “unusual and exigent circumstances.” Fed officials have discussed using firmer language to indicate that it plans to keep rates near zero for longer than markets now expect. They’ve also started talking about how to boost inflation from current low levels, essentially shooting for higher inflation for a time and ease any lingering worries that the U.S. is headed toward deflation. Higher inflation is a way to push “real” — or inflation-adjusted — interest rates down. That, the theory goes, would encourage more spending and investing and less saving.

Tuesday, November 02, 2010

Quote of the Day

"A mind that is stretched by a new experience can never go back to its old dimensions."
Oliver Wendell Holmes: American writer and Professor at Harvard, 1809-1894

Early Look: A Retail Bid?

The market is higher again in early trading, but lately most of these early pops have faded into the close. On 10/25, the market opened sharply higher but faded by the close that day. Yesterday the market had big gains in early trading, but actually closed in negative territory. So when I saw today's early pop, my first thought was I wonder if it holds.

I am surprised the market is up this much ahead of the elections and tomorrow's FOMC announcement. I think tomorrow could be a big volume day in the market, given these two large catalysts.

Asian markets were flattish overnight, while Europe was higher after strong PMI reports for Germany and eurozone. In Asia, the Reserve Bank of Australia raised its benchmark interest rate to 4.75% (from 4.50%) to ward off inflation. I think other Asian countries could follow suit if the global economy stays strong.

The dollar is lower, pushing gold up to $1355 and oil prices all the way to $83.88. The 10-year yield is lower to 2.60%; and the VIX is down 1% to 21.59.

There were some more earnings reports in the healthcare space from Pfizer (PFE), Amerisource (ABC), TEVA, etc. While most reports were better than expected, a lot of the stocks are selling off on the news.

Trading comment: The SPX touched 1194 this morning, but it is already fading and falling back below 1190. I do not think today is a good day to put money to work. The market has been rallying for weeks, and we have two huge announcements tomorrow. Unless there are some big surprises, I think it is more likely that we see some profit taking as opposed to new buying.

That said, I will admit there has been a persistent bid under the market lately, so who knows. But that's how I am playing it.

Monday, November 01, 2010

Busy Week On Tap For The Markets

The markets are nicely higher in early trade, after strong data out of China was followed by good economic news here in the US also. Overnight, Asian markets rallied (China +2.5%) after a strong PMI report in China. That helped our markets head higher out of the gate, but then get a boost when our ISM Manufacturing index came in at 56.9, above estimates and above last month's reading of 54.4. The manufacturing sector continues to be the bright spot of this recovery.

That's about all the news we should expect for today, in addition to some M&A news that was announced this morning, but there are some very big items on tap for the markets for the remainder of the week: Tuesday is Election Day in the US, and the outcomes and potential for gridlock in Washington will likely move markets; Wednesday is the FOMC announcement, and the question of how big any additional QE measures will be is eagerly anticipated; last, Friday's jobs number is always a big market moving event. So this week should have plenty of fireworks.

The dollar is flattish this morning, but oil and gold prices are higher. Oil is all the way up to $83.50, and gold prices are slightly higher to $1360.

Among sector ETFs, energy is leading the way (+1.50%) so far today, followed by industrials (+1.18%); utilities (+0.25%) are lagging, along with consumer staples (+0.35%).

The 10-year yield just moved up a bit to 2.62%; while the VIX is lower to 20.93.

Trading comment: I think a lot of traders thought the market would begin to selloff this week, so this morning's strength is a bit of a surprise. Of course, today's rally could easily be reversed by any surprises out of Election Day tomorrow or the Fed on Wednesday. I raised some cash last week to be in a position to take advantage of any dips. I hope that everyone else isn't already on that same page, and thus we don't get any dips.

It was also somewhat surprising that the market didn't sell off at all last week on the news of questionable packages on that flight. It just shows that lately good news has boosted the markets, while bad news has had little damaging effect.

Earnings season begins to wind down now, and I think most view it as a big success that so many companies beat estimates and provided strong forward guidance.