Daily State of the Markets 01/24: Time To Take a Break?


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January 24, 2011 8:57 AM EST Send to a Friend
Good morning. Although the DJIA powered on to its 8th straight weekly gain (thanks primarily to IBM, GE, HD, and WMT), the rest of the market indices went the other way with the Russell 2000, Midcaps, and the NASDAQ notably weak. And for the most part, Friday's action continued the trend as the Dow finished up +49 while the NASDAQ, Russell and Midcaps all declined. So what do we take away from this divergent behavior? Perhaps a review of the big picture will help, so let's see where we're at.

For starters, it is quite clear that investors continue to enjoy what most see as a cyclical bull market that began on March 9, 2009. Through Tuesday, the bulls had romped to a gain of +94% on the S&P 500, while the DJIA is up +81%, and the NASDAQ has seen a gain of 118%. The good news is that our cycle work suggests that this bull has some life left and if history is any guide, a gain in excess of 20% may still be in the cards. However, our historical work also suggests that this may be the bulls' last hurrah as the bear may take possession of the ball for a meaningful run later this year.

Thus, there is a decent chance that we're entering what is commonly referred to as the "blow off" stage. During this type of move the market tends to defy logic and become overvalued in the process. But while the bulls are making their last run, it is important to recognize that corrections tend to be shallow. As such, the dip-buyers will likely continue to be rewarded and anyone looking for anything more than a modes pullback may be disappointed for a while yet.

Which brings us to the present and back to the short-term perspective. Given that (a) the bulls have been running hard since September 1st, (b) the market has become very overbought in the process, (c) investor sentiment has reached extremely positive levels, (d) the market indices are no longer singing the same happy tune, and (e) our timing models are no better than neutral at the moment, it is fairly easy to say that it just might be time for the bulls to take a break - at least for a week or two.

Does this mean stocks are heading down hard? Although the leaders are indeed being smacked around pretty good at the moment, the major indices are holding up fairly well. This leads us to believe that while the bears may want to explore the downside a bit more in the near-term, our heroes in horns are likely to emerge from this scuffle victorious.

As you might have ascertained by now, there is an awful lot of speculation involved with this morning's analysis. As such, it is probably best to avoid any further use of the crystal ball and to continue to try to identify the market drivers on a daily basis. In short, traders will be watching China, the economic data, as well as the ongoing earnings parade closely.

So, it is time for the bulls to take a break? It would appear that the broader indices are already three days into one. However, should the venerable DJIA refuse to yield, the current break may not last long.

Turning to this morning... Things are fairly quiet in the early going. The government is selling off some more of their Citi holdings and European markets are holding up fairly well.

On the Economic front... There is no economic news scheduled for release today.

Thought for the day: Remember that it pays to be open minded (in more ways than one)...

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

* Major Foreign Markets:
o Australia: +0.56%
o Shanghai: -0.68%
o Hong Kong: -0.31%
o Japan: +0.69%
o France: +0.01%
o Germany: -0.63%
o London: +0.24%

* Crude Oil Futures: - $0.26 to $88.85
* Gold: + $6.30 to $1347.30
* Dollar: lower against the Yen, higher vs Pound and Euro
* 10-Year Bond Yield: Currently trading at 3.424%

* Stocks Futures Ahead of Open in U.S. (relative to fair value):
o S&P 500: +2.10
o Dow Jones Industrial Average: +10
o NASDAQ Composite: +4.93

Wall Street Research Summary

Upgrades:

* Waddell & Reed (NYSE: WDR) - BofA/Merrill
* Kinetic Concepts (NYSE: KCI) - BofA/Merrill
* Apple (Nasdaq: AAPL) - Mentioned positively at Deutsche Bank
* First Solar (Nasdaq: FSLR) - Added to Conviction Buy at Goldman Sachs
* Harley Davidson (NYSE: HOG) - Estimates and target increased at UBS

Downgrades:

* Janus Capital (NYSE: JNS) - BofA/Merrill
* Smithfield Foods (NYSE: SFD) - BB&T Capital Markets
* Tyson (NYSE: TSN) - BB&T Capital Markets
* OmniVision (Nasdaq: OVTI) - RW Baird

Earnings Before the Bell

Company
Symbol
EPS Reuters
Estimate
Halliburton HAL $0.70 $0.63
McDonald's MCD $1.16 $1.16
Sealed Air SEE $0.46 $0.46
Steel Dynamics STLD $0.07 $0.09

Long positions in stocks mentioned: AAPL

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