Daily State of the Markets 09/29: A Complete Contradiction?

Good morning. If you don't mind, please take a moment and put your thinking caps on for me. Now, let's put the following data into our crowded brains and see what we come up with. First, we learned yesterday that The Conference Board's Consumer Confidence Index took a dive in September as all the bad economic news finally caught up to the public. Next, we learned that the Richmond Fed also took a pretty big hit and continued its downtrend trend in September, falling to -2 from +11 in August (and for the record, here's the recent data: July +16, June +23, May +26, April +30). This was on top of the surprisingly weak data from Monday's Chicago Fed National Business Activity Index. Finally, let's toss in the fact that bond yields plunged with the yield on the 10-year falling to its lowest level of this cycle (2.456%).

So, given the above inputs, what should we expect stocks to do? Let's review: Weak economic data plus falling bond yields equals... Yep, that's right, a Dow rally of nearly 50 points! Huh?

As a trader, we should be applauding the bulls for pulling off a nice gain in what would appear to be a complete contradiction in terms. By definition, bond yields fall on bad news and stocks tend to follow suit. But as the saying goes, it ain't the news, but how the market reacts to the news that matters. So, traders everywhere could be heard cheering the bulls' big accomplishment on Tuesday. And putting all sarcasm aside, we will admit that our heroes in horns are to be commended for their efforts.

But as a card carrying member of the There Has To Be a Reason Behind the Big Moves Club, I'm a little befuddled. While I can give you several reasons why stocks may move up on what would appear to be bad news, none of them are really great explanations. For example, we've got the end-of-the quarter window dressing rationale, which sometimes seems to be a factor in the market and sometimes not. And while I could go on, the most likely excuse for stocks to rally on bad news and falling bond yields (and rising gold prices) is the Tepper Trade.

As you may recall, big-time hedge fund manager David Tepper told CNBC recently that stocks win whether the economy goes up or down. Mr. Tepper opined that if the economy tanks from here, the Fed would launch QE II and save the day, which, in turn, would mean higher stock prices eventually. So, the argument can be made that Tuesday's rebound was in anticipation of the Fed taking action.

While the gain of 46 points was certainly enjoyable to see for anyone holding equities on Tuesday, we should keep in mind that we are still sitting in the same spot we were on Friday. So, until the Bulls can push on, we're going to curb our enthusiasm.

Turning to this morning... We've got ongoing concerns in Europe about the Anglo Irish Bank situation as well as word out of China that their economy continues to grow and that more tightening measures are on the way.

On the economic front... there is no economic data scheduled for release for today.

Finally, remember that there is more to life than increasing its pace...

Pre-Game Indicators

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

• Major Foreign Markets:
  
  • Australia: -0.49%
    
  • Shanghai: -0.03%
    
  • Hong Kong: +1.22%
    
  • Japan: +0.67%
    
  • France: +0.34%
    
  • Germany: +0.03%
    
  • London: -0.03%
• Crude Oil Futures: + $0.28 to $76.46
  
• Gold: + $1.90 to $1310.20
  
• Dollar: higher against the Yen and Pound, lower vs. Euro
  
• 10-Year Bond Yield: Currently trading higher at 2.485%
  
  
• Stocks Futures Ahead of Open in U.S. (relative to fair value):
  
  • S&P 500: -0.95
    
  • Dow Jones Industrial Average: -2
    
  • NASDAQ Composite: -1.83

Wall Street Research Summary

Upgrades:
Advanced Semiconductor (NYSE: ASX) - BofA/Merrill
Siliconware Precision (Nasdaq: SPIL) - BofA/Merrill
Taiwan Semiconductor (NYSE: TSM) - BofA/Merrill
United Micro (NYSE: UMC) - BofA/Merrill
Carnival Corp (NYSE: CCL) - Goldman Sachs
Check Point Software (Nasdaq: CHKP) - Morgan Stanley
Jabil Circuit (NYSE: JBL) - Needham
ULTA (Nasdaq: ULTA) - Target and estimates increased at Oppenheimer
Endo Pharmaceuticals (Nasdaq: ENDP) - Oppenheimer
Green Mountan Coffee (Nasdaq: GMCR) - Mentioned positively at Piper Jaffray

Downgrades:
McAfee (NYSE: MFE) - Deutsche Bank
J. Crew (NYSE: JCG) - Janney Capital
Websense (Nasdaq: WBSN) - Morgan Stanley
Advent Software (Nasdaq: ADVS) - Needham
Turkcell (NYSE: TKC) - UBS

Long positions in stocks mentioned: none

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

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