Daily State of the Markets 09/22: Blame It On The Bonds (Again)

Good morning. Although volatility following a FOMC announcement is nothing new, yesterday's sudden dive was a little on the surprising side. No sooner had I finished explaining to a colleague that the post-announcement rally was in response to the idea that Bernanke & Co. were on the case and would not let the economy falter here than the market turned on a dive and sold off into the close. And while the major indices finished okay, the rather dramatic turnabout certainly got my attention.

Stocks initially rallied after the Fed left rates unchanged and reaffirmed their pledge to do whatever it takes to keep the economy moving forward. My take was that the modest change in the FOMC statement language was a confidence builder. In addition, most analysts felt that the statement seemed to confirm the idea that Bernanke was leaning toward setting sail on the QE II in the next couple of months. And as PIMCO's Bill Gross said yesterday, since the first quantitative easing program produced a big rally in stocks, which faltered when the program ended, another round of "QE" would seem to be a plus for the market.

However (you knew that was coming, right?), the action in bonds and the dollar after the FOMC announcement was not terribly encouraging. In short, both the yield on the 10-year bond and the greenback took big dives. Bond yields broke the recent uptrend, which supposedly was taking place in response to improving economic conditions. And the dollar fell to a new closing low for this cycle.

While we could argue all day about the reasons behind the movements in the various markets, the bottom line here is that it didn't take stock traders very long to recognize the big declines in both the buck and bond yields. Thus, within minutes of the market reaching its high for the day, the sell programs started.

From a chart perspective, yesterday's post-Fed volatility didn't really have much of an impact. Given that the market has run a long way in a short period of time and has become very overbought along the way, a pullback is certainly to be expected. And market technicians will point out that a retest of the breakout area would actually be a good thing. However, we can't help but be concerned about yesterday's action in the bond market and the fact that the VIX never confirmed the stock market's breakout.

So, with the S&P is up +8.62% so far in September, we're going to head into today's session with a fair amount of skepticism and will be watching for any signs that the bulls may have misplaced their mojo (even if only for a short period of time).

Turning to this morning... We do not have any economic news to review before the bell, however, we will get the FHFA House Price Index at 10:00 am eastern. Stock futures are pointing to a modestly lower open on the back of weak earnings from ADBE, declines in Europe, and a disappointing bond auction in Portugal.

Finally, be sure to take time to breathe today...

Pre-Game Indicators

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

• Major Foreign Markets:
  
  • Australia: +0.21%
    
  • Shanghai: +0.11%
    
  • Hong Kong: +0.21%
    
  • Japan: -0.37%
    
  • France: -0.82%
    
  • Germany: -0.94%
    
  • London: -0.38%
• Crude Oil Futures: + $0.58 to $73.93
  
• Gold: + $20.60 to $1294.90
  
• Dollar: higher against the Yen, lower vs. Euro and Pound
  
• 10-Year Bond Yield: Currently trading lower at 2.54%
  
  
• Stocks Futures Ahead of Open in U.S. (relative to fair value):
  
  • S&P 500: -0.52
    
  • Dow Jones Industrial Average: -16
    
  • NASDAQ Composite: -7.36

Wall Street Research Summary

Upgrades:
Energizer (NYSE: ENR) - BMO Capital
Vivus (Nasdaq: VVUS) - Canaccord Genuity
Accenture (NYSE: ACN) - Mentioned positively at Citi
Dolby Laboratories (NYSE: DLB) - Deutsche Bank
Watsco (NYSE: WSO) - Oppenheimer
Baxter (NYSE: BAX) -Soleil Securities

Downgrades:
AMR Corp (NYSE: AMR) - Target reduced at Citi
Adobe Systems (Nasdaq: ADBE) - Credit Suisse
Goldman Sachs (NYSE: GS) - Estimates reduced at Deutsche Bank, FBR Capital, ISI Group, RW Baird, UBS
FactSet (NYSE: FDS) - Stifel Nicolaus

Long positions in stocks mentioned: none

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