Daily State of the Markets 09/21: Reason? We Don't Need No...

Good morning. I got a call from a colleague yesterday asking about the reason the stock market had suddenly and without warning, broken out to the upside. My friend figured that since stocks had been going sideways for such a long period of time that something monumental must have happened in order for the bulls to be able to break on through to the other side (and for the record, yes, it is best if you replay The Door's song in your head each time you see that phrase). And since my friend knew that I am a steadfast believer that there usually is a pretty good reason behind the big moves in the market, the call was to be expected.

However, my answer was not. Wondering where I had put that silly sombrero I once owned, I responded quickly using my best (which, I'm told, really isn't very good at all) "Blazing Saddles" imitation... "Reason? Reason? We don' need no stinkin' reason!" I exclaimed. While my long-time colleague knew exactly what I was getting at, he didn't believe it. "Do you mean to tell me that after four miserable months and five trips through the trading range, stocks just broke out on their own without any news, reason, or catalyst?" To which, he followed up in a rather exasperated tone, "Are you kidding me?"

After some discussion about me pulling his leg, I did finally get down to business and with as straight a face as I could muster, I told my friend that it was the National Bureau of Economic Research's (aka NBER) pronouncement that the recession had officially ended in June 2009, that was behind the sudden joyride to the uspide. From there, I opined that after the bears couldn't reverse the move over the next couple of hours, the short-covering probably took over.

I also mentioned that there had been a fair amount of chatter about a beautiful head-and-shoulders bottom formation on the weekly chart of the S&P 500 (which, of course, was occurring directly after the failed head-and-shoulder top formation). So, with positive technical action and the shorts scrambling, I suggested that we suddenly found ourselves with a jail break that most chart watchers could be proud of.

I went on to say, "Well, okay, except for the fact that a breakout from an important chart formation usually does need some sort of a trigger. And by that, I mean something other than a pseudo-governmental confirmation of an event that everybody knows has actually occurred. And okay, there is usually a healthy increase in volume involved, which, by the way, didn't happen yesterday. And then, there is the fact that the VIX didn't follow suit. But other than that," I said, "everything is textbook."

If you detected a slight hint of sarcasm in my telephone go 'round with my colleague, give yourself a gold star. Sure, we can argue that the tape tells all and that stocks didn't really need a reason to move higher yesterday. And I guess I can also make the case that the good news about the economy ought to put the public in a better mood, which, in turn, means more spending, yada, yada, yada. But the bottom line appears to be that the S&P broke simply through 1130 and didn't look back.

So, in light of the fact that I may not be the only one that might be a little skeptical of the move, it will be interesting to see how the market reacts once some selling commences. If the breakaway is for real, the bulls ought to be able to defend the breakout area at around 1030ish on the S&P 500. And if we do get a little pullback that represents a successful test of that area, then it might be time to "buy 'em." However, we will also remain on the lookout for the dreaded "breakout fakeout" over the next few days.

Turning to this morning... With the Fed on tap at 2:15 this afternoon, things are relatively quiet so far in the early going.

On the econonic front... Housing Starts rose 10.5% in August to an annualized rate of 598K, which was well above the consensus for 545K. Next, Building Permits for August rose by 2% to 569K. This was also above the consensus of 557K and the July’s reading of 559K.

Finally, don’t let success go to your head or defeat into your heart...

Pre-Game Indicators

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

• Major Foreign Markets:
  
  • Australia: -0.26%
    
  • Shanghai: +0.11%
    
  • Hong Kong: +0.11%
    
  • Japan: -0.25%
    
  • France: +0.84%
    
  • Germany: +0.40%
    
  • London: +0.38%
• Crude Oil Futures: - $0.93 to $73.93
  
• Gold: - $4.20 to $1276.60
  
• Dollar: higher against the Yen and Pound, lower vs. Euro
  
• 10-Year Bond Yield: Currently trading lower at 2.668%
  
  
• Stocks Futures Ahead of Open in U.S. (relative to fair value):
  
  • S&P 500: +0.50
    
  • Dow Jones Industrial Average: +4
    
  • NASDAQ Composite: -2

Wall Street Research Summary

Upgrades:
Hartford Financial (NYSE: HIG) - Barclays
Nabors Industries (NYSE: NBR) - Goldman Sachs
Vulcan Materials (NYSE: VMC) - Jefferies
Cognizant Technologies (CTSH) - Target increased at Openheimer
Teradata (NYSE: TDC) - Target increased at Openheimer
Nike (NYSE: NKE) - Estimates and target increased at UBS
Eaton (NYSE: ETN) - Estimates increased at Wells Fargo

Downgrades:
Rockwell Collins (NYSE: COL) - Argus Research
Whole Foods (Nasdaq: WFMI) - Credit Suisse
Sanderson Farms (Nasdaq: SAFM) - JPMorgan
Owens-Illinois (NYSE: OI) - Macquarie Research
Micron (NYSE: MU) - Sterne, Agee
SanDisk (Nasdaq: SNDK) - Sterne, Agee

Long positions in stocks mentioned: none

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

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