Daily State of the Markets 12/08: At Some Point...

Good morning. At some point, the current log jam on the charts of the major stock indices will break. At some point, the linkage between the movement in the dollar and the stock market will end. And at some point, good news for the economy will be good news for stocks. But until that day comes, it looks like the battle for the breakout as well as the dollar conundrum will continue.

For the eleventh time out of the last fourteen trading days, the bulls were turned away near the top end of the current trading range yesterday. And while I don’t want to sound like the boy who cried wolf, it is widely accepted in technical analysis circles that the more times a support or resistance zone is tested, the stronger it becomes. Then, when you factor in the three straight ‘breakout fakeouts’ we saw last week, well, to hear the bears tell it, it’s a wonder the bulls are still hanging around.

Looking only at the results of the close, it would be easy to think that Monday was a dull day without much action or meaning. However, despite the miniscule net changes in the major indices, it is very important to note that the dollar/stock linkage was back in a big way yesterday.

As we mentioned above, at some point, positive economic news will equate to higher earnings for corporate America, which, in turn, will equate to higher stock prices and a stronger dollar. All of which would appear to be good things from big picture perspective. But for now, anything that promotes a stronger dollar is a negative for ‘risk assets’ such as stocks and commodities.

Yesterday’s remarks from Fed Chairman Ben Bernanke were a perfect example of the current market conundrum. In a presentation to the Economic Club of Washington, Ben Bernanke stuck to the party line regarding his comments on the economy. He said that the economy should recover in 2010 and that inflation should remain constrained for some time. The Fed Chairman noted that the Fed will have to unwind the extraordinary stimulus measures at some point, but in light of the fact that the economy faces “formidable headwinds” such as a weak labor market and tight credit, the comments seemed to suggest that there is still no change in the Fed’s view that interest rates will need to remain low in the U.S. for an “extended period.”

If you are thinking that such comments weren’t exactly news worthy, you have earned a silver star. However, in order to get the gold star on the day, you have to think about how Mr. Bernanke’s comments affected the dollar, and in turn, the stock market.

Word that the economy is recovering is certainly good news, right? And the idea that inflation is expected to remain low is also a positive. Thus, if you stopped there, you might have expected to see the dollar rise. But, the key phrase currency traders latched onto was the discussion of the formidable headwinds such as a weak labor market and tight credit. In trader-speak, this meant that despite Friday’s surprisingly good economic numbers, the Fed doesn’t see substantial improvement in the economy. Thus, those brave souls that had gone long the dollar were forced to sell and with the dollar in retreat, stocks shot higher around lunchtime.

But from there, the dollar improved and managed to work its way back to pre-Bernanke levels. Naturally, stocks responded in kind by fading into the close. So, at some point, this linkage will break and good news will be good news. But, until it does, all traders are now currency traders.

Turning to this morning, we don’t have any economic data to review before the opening bell. However, there is a fair amount of news moving the markets this morning – and not in a good way. First, Germany’s Industrial Production numbers were not positive. Next, Fitch has downgraded the credit rating of Greece. And finally, there is word of very big losses from Dubai real estate developer Nakheel.

Running through the rest of the pre-game indicators, overseas markets are lower across the board. Crude futures are lower with the latest quote showing oil trading down by $1.57 to $72.66. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.38%, while the yield on the 3-month T-Bill is currently at 0.02%. In addition, gold is down again by $19.30 and the dollar is higher against the Yen, Euro, and Pound. Finally, with about 60 minutes before the bell, stock futures in the U.S. are pointing to a lower open. The Dow futures are currently off by about 80 points; the S&P’s are down about 10 points, while the NASDAQ looks to be about 17 points below fair value at the moment.

Wall Street Research Summary

Upgrades:

Motorola (MOT) – Initiated outperform at Bernstein
Nokia (NOK) – BMO Capital
Sysco (SYY) – Citi
McDermott (MDR) – Davenport
Biomed Realty (BMR) – FBR Capital
Boston Properties (BXP) – FBR Capital
Dollar Tree (DLTR) – Mentioned positively at Morgan Stanley
Forest Oil (FST) – Morgan Stanley
Symantec (SYMC) – Target increased at Oppenheimer
Check Point Software (CHKP) – Target increased at Oppenheimer
M&T Bank (MTB) – SunTrust Robinson
Ivanhoe Mines (IVN) – TD Newcrest
Suntech Power (STP) – Thomas Weisel
JA Solar (JASO) – Thomas Weisel

Downgrades:

Corning (GLW) – Davenport
AvalonBay (AVB) – FBR Capital
Equity Residential (EQR) – FBR Capital
Sprint Nextel (S) – Pali

Long positions in stocks mentioned: None

Don’t forget, ego is the enemy… and until next time, “may the bulls be with you!”

David Moenning


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The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management (HCM) and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security or Heritage Capital program. No part of this material is intended as an investment recommendation. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any of HCM’s programs. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that investment objectives outlined will actually come to pass. Investors should consult an Investment Professional before investing in any investment program. Neither Mr. Moenning or Heritage Capital Management nor any of their employees shall have any liability for any loss sustained by anyone who has relied on the information contained herein. Mr. Moenning and employees of HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while this publication is in circulation. The analysis contained is based on both technical and fundamental research. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

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