State of the Markets: Taking a Breath

Good morning. After dealing with four weeks of frenetic trading and vaulting more than 400 points higher in the prior three sessions, it appears that traders decided to step back and take a breath on Tuesday. While the bulls argue that Tuesday was merely a much-needed rest after an impressive bounce from last week's panic-low, the glass-is-half-empty crowd is saying there are just too many negatives/uncertainties present right now for stocks to move higher.

It is always interesting to me to see how sentiment amongst the talking heads/press can shift in a very short time. As of February 18, all anybody could talk about was the potential gains for stocks, given the targets Wall Street firms had put on the major indices for calendar 2011. And with the economic data consistently beating expectations (and even a little job growth starting to percolate), the public had decided to finally get back in the game. In short, the game was all about the upside at that time and there was a feeling that no one wanted to miss out.

But if we fast-forward to the present, we find that the sentiment is now almost diametrically opposed. Worries about oil, Libya and the unrest in the region, the disasters in Japan, a pickup in inflation expectations, and how the consumer will react to any and/or all of the above now dominate the talk in the market. Thus, in just one month's time, the perception has gone from "blue skies ahead" to "things are now bad and going to get worse."

I also find it very interesting how sentiment is so easily swayed. It's as if those people offering their opinions to the news media are only able to "predict" what has just happened. On that note, it seems that most everyone is very busy preparing for and fighting the last war. I guess this makes sense in that anyone willing to go on T.V. wants to "look smart" by suggesting that they are in tune with whatever is happening at that very moment. But in reality, this game is about keeping up with what is driving the market -- not necessarily simply reacting to what everyone expects you to say.

But once again, I digress (how the mind wanders in the wee hours!). Our view is that, given the bounce up off of last week's low, it is fairly safe to say that the markets appear to have gotten comfortable with the troubles in both Japan and Libya/MENA. However, with the major indices now bumping their heads on what looks to market technicians as important resistance (Dow 12K, S&P 1295-1305, and Nasdaq 2700), we can also say that there is enough uncertainty out there to keep the bulls from returning to their upside ways.

So, it looks like we've got a ballgame on our hands. If you are a fan of historical tendencies, you should probably be looking for the bears to retest the recent lows over the next few sessions. After all, corrective phases do tend to follow similar patterns. But then again, given that we may still be in the midst of a news-driven environment, we're going to keep our eyes and ears open as there is really no telling which way traders (and their computers) will decide to go once they get done catching their breath.

Turning to this morning ... Reports of a spike in radioactive iodine levels found in Tokyo's tap water, continued problems in MENA, another jump in crude, and talk of Portugal needing a bailout if the government doesn't approve austerity measures today have put the market in a modestly defensive position in the early going.

On the economic front ... We do not have any economic data to review before the bell, but we will get a report on New Home Sales at 10:00 am Eastern.

Thought for the day: Remember to think positive today ...

Pre-Game Indicators

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

• Major Foreign Markets:
  • Australia: +0.19%
  • Shanghai: +1.03%
  • Hong Kong: -0.14%
  • Japan: -1.65%
  • France: -0.03%
  • Germany: -0.35%
  • London: -0.02%
• Crude Oil Futures: +$0.51 (May contract) to $105.48
• Gold: +$6.10 to $1433.70
• Dollar: Higher against the yen, euro and pound
• 10-Year Bond Yield: Currently trading at 3.286%
• Stocks Futures Ahead of Open in U.S. (relative to fair value):
  • S&P 500: -3.80
  • Dow Jones Industrial Average: -12
  • NASDAQ Composite: -7.3

Wall Street Research Summary

Upgrades:

• Owens Corning (OC) - BAC/ML
• Deutsche Telekom (DT) - BAC/ML
• Goodyear Tire (GT) - Estimates increased at Citi
• Bunge Ltd (BG) - Deutsche Bank
• Pulte Group (PHM) - Added to Conviction Buy at Goldman Sachs
• CSX Corp (CSX) - Goldman
• Textron (TXT) - JPMorgan
• Harris Corp (HRS) - Oppenheimer
• Gilead Sciences (GILD) - Target increased at UBS
• AOL (AOL) - UBS

Downgrades:

• Brightpoint (CELL) - Citi
• Canadian Pacific (CP) - Goldman
• Carnival Corp (CCL) - Removed from Conviction Buy at Goldman
• Concho Resources (CXO) - Stifel Nicolaus

Long positions in stocks mentioned: None