Monday, April 18, 2011

Monday Morning Musings

Happy Monday. I looked at the futures before I went to bed last night and things looked calm. But this morning the news came out that Standard & Poor's issued a negative outlook on U.S. debt ratings, and that really hit the market.

It shouldn't be that big of a surprise, given the high levels of debt the U.S. currently has, but investors don't like to hear any negative news regarding U.S. debt. Interestingly, bond yields remain flat on the day, and the dollar is actually higher due to the 'flight to safety' trade that is on today. Gold prices are also benefiting, up to $1493, while oil prices are falling back to $107.

If we weren't talking about the U.S. debt ratings today, the focus would be back on European sovereign debt, where the CDS spreads are blowing out again. Greece's are at new record highs amid speculation they might need to restructure their debt. Also, we have talked about tightening monetary policy in China. Over the weekend, the PBOC raised their reserve requirement ratio another 50 basis points in response to rising inflationary pressures. The risk of a hard landing in China is increasing.

There were a couple of positive earnings reports this morning, with Citi (C) and Halliburton (HAL) reporting strong results. But the selling pressure is too strong right now, and those stocks too have given up their early gains. The volatility index, which hit a new multi-month low on Friday, is spiking +21% so far today back to the 18.65 level.

Trading comment: We said with the major averages below their 50-day moving averages that the markets were in a defensive position. But I want to use this weakness to start putting a little money to work. We know from past pullbacks that the plan is to put cash to work in stages. The reason you have to put some to work on the first leg down, even if you expect more weakness, is that about a third of the stocks will bottom on a day like today. And since you don't know which ones exactly, you have to start picking at names you like and adding a little. And although tech has been out of favor, if we didn't have such big positions in Apple (AAPL), I would be adding to it here. long AAPL, HAL


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