MorningWord 1/23/12: All is really right in the world, the Euro is back above 1.30 vs US dollar, wow who would have thunk it? I guess it really had become a fairly crowded trade. European equity markets are up across the board this am, as EU finance heads are meeting today in Brussels for what seems like the 100th summit in so many days to make a plan to deal with Euroland’s debt issues. The markets are very calm ahead of today’s festivities, as expectations aren’t exactly high, and any results are only likely to kick the can down the road when they finally reach a plan agreed apon by everyone else and then by Z-Germans. European Sovereign debt seems to be the tell here with the Italian 10 year yield down about 1% from this year’s highs.
Earnings for the most part on this side of the pond, coupled with economic data all seem “less bad” in the new year, and are driving most of the positive sentiment and the talk of re-testing last May’s highs that sit about 4% from current levels…..I am of the mindset that once we get through the bulk of this week’s earnings and we have the FOMC policy update and Bernanke conf call (Wednesday afternoon) in the rear-view mirror that the rally may start to peter-out when investors consider that much of their enthusiasm as it relates to the stock market and the economy are coming from upside to estimates that had been dramatically decreased over the last couple quarters. Company’s are beating estimates that were raised a year ago and then have been coming down for the last 4 months, same goes for our economic data that swung from overly optimistic in Q2 last year to possibly overly pessimistic over the last couple months. I often say this about markets, but this pertains to most sentiment related inputs we collectively use to analyse the markets, ” price action tends to overshoot on the upside, just as it does on the downside and vice versa”. This is exactly what we appear to be doing right now and why many bulls squarely have 1370 in their scopes. There are plenty of names that appear not to be letting up like INTC, MSFT, BAC and CAT but action from a market leader like GOOG on Friday could be a sign of things to come as investors re-set their expectations for 2012 with almost 5% gains already in the tank.
I read something on Bloomberg this morning that I thought was kind of interesting and helps make this point…..
Divergence between S&P 500 making new high while the number of stocks in the index making new 52- wk highs shrinks may be “early sign that the market is tired,” says Strategas technical analyst Chris Verrone.
• Number of stocks making new 52-wk highs Friday was 126 vs. 215 on Dec. 27, 2011: Verrone
• Sees “lots” or resistance at 1320, 1347, 1357, 1371; sees “healthy” support at 1278, 1257, 1247, 1230; says 150pt trading range “will continue to define trading in the months ahead”: Verrone
Verrone added the following early last week in a Bloomberg story dated Jan 17th;
The stock-market rally has driven short interest to a nine-month low and bearish sentiment close to a six-year low, a sign that few investors may be left to propel further gains.
As for today I think it is important to watch names like MSFT, INTC, IBM, GOOG and of course the banks as they were all big movers on Friday. AAPL to me will be the main event this week, not because it will be a big mover for the broad market, we know that their market share has little to do with competitive pressures, but much like GOOG a break-down on volume could signal a change in leadership for the market and cause investors to question so of the very crowded trades in the market.