Daily State of the Markets 10/04: Pressing Pause (Again)

Good morning. A quick glance at the charts suggests that traders may have hit the pause button on the game last week. After a "September to remember" (i.e. the best September since 1939), a break in the action was certainly warranted. And to be fair, October isn't looking too shabby either as the S&P is up so far during the most feared month of the year.

The question of the day, of course, is if the current pause will turn out to be a "pause that refreshes" or the "calm before the storm." The technical analysis textbooks tell us that a period of sideways movement is usually a consolidation pattern and that the security in question should exit the pattern heading in the same direction it was moving before the consolidation began. However, anyone playing this game is 0-3 so far in 2010.

While most traders' memories are fairly short (a requirement of the game) and the long-term is often times viewed as the lunch bell, it is interesting to note that there have been three periods of sideways consolidation this year. Cutting to the chase, none of them ended well.

In January, stocks paused for six trading days before embarking on a big dive that took the S&P down more than 8.5%. Then after a very enjoyable rally, stocks went sideways for much of April. Which, as you may recall, preceded the most meaningful correction (-16.6% if memory serves) of the current cyclical bull market. We also saw a five-day sideways pattern develop at the beginning of August, which, once again ended with the bulls wondering where they had gone wrong.

So, will this time be different? Will the current consolidation lead to another leg higher or will the bears recognize a familiar (and profitable) setup? Will the current worries about sovereign debt in Europe and a lackluster rebound here at home push the indices back into the trading range, producing the dreaded "breakout fakeout" in the process? Or, will the bulls be greeted with another round of strong earnings and begin to decouple from the macro theme that has gripped the market for the last six months? Obviously no one knows for sure which way the current consolidation will end. However, we will suggest that neither team has earned the right to become complacent.

Looking ahead to this week, the good news is that Congress is in recess until the elections. However, we do have the Big Kahuna of economic data - the Nonfarm Payroll report - due out on Friday. So, be sure to stay tuned as the game could resume at any time.

Turning to this morning... There is still a fair amount of talk about sovereign debt and macroeconomic concerns as Ireland's central bank cut its GDP forecast to just +0.2% in 2010 and there is talk of UK banks needs a boatload of funding next year (that may or may not need to be provided by the government). As such, the action is a little sloppy so far in the early going.

On the economic front... we don't have any economic data to review before the bell, but we will get reports on Factory Orders and Pending Home Sales at 10:00 am eastern.

Finally, don’t forget, ego is the real enemy in this game...

Pre-Game Indicators

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

• Major Foreign Markets:
  
  • Australia: +0.94%
    
  • Shanghai: na
    
  • Hong Kong: +1.17%
    
  • Japan: -0.25%
    
  • France: -0.97%
    
  • Germany: -0.94%
    
  • London: -0.12%
• Crude Oil Futures: - $0.28 to $81.30
  
• Gold: - $2.20 to $1315.60
  
• Dollar: flat against the Yen, higher vs Euro, and lower vs. Pound
  
• 10-Year Bond Yield: Currently trading lower at 2.486%
  
  
• Stocks Futures Ahead of Open in U.S. (relative to fair value):
  
  • S&P 500: -3.24
    
  • Dow Jones Industrial Average: -30
    
  • NASDAQ Composite: -6.20

Wall Street Research Summary

Upgrades:
Weingarten Realty (NYSE: WRI) - BofA/Merrill
Cooper Companies (NYSE: COO) - BMO Capital
JA Solar (Nasdaq: JASO) - Canaccord Genuity
AngloGold Ashanti (NYSE: AU) - Credit Suisse
Phillips-Van Heusen (NYSE: PVH) - Goldman Sachs
Ingersoll-Rand (NYSE: IR) - Target increased at JPMorgan
Allstate (NYSE: ALL) - JPMorgan

Downgrades:
Lexmark (NYSE: LXK) - Barclays
AOL (NYSE: AOL) - Benchmark
SunPower (Nasdaq: SPWRA) - Canaccord Genuity
Suntech Power (NYSE: STP) - Canaccord Genuity
JC Penney (NYSE: JCP) - Goldman Sachs
Macy's (NYSE: M) - Goldman Sachs
Microsoft (Nasdaq: MSFT) - Goldman Sachs
Avon Products (NYSE: AVP) - Morgan Stanley
Bristol-Myers (NYSE: BMY) - Morgan Stanley
Questar (NYSE: STR) - UBS
Omnicare (NYSE: OCR) - UBS
Kellogg (NYSE: K) - UBS

Long positions in stocks mentioned: AVP

For more "top stock" portfolios and research, visit TopStockPortfolios.com

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