Daily State of the Markets 09/25: Irish Eyes

Good morning. Sometimes things are as obvious as they seem. With the market overbought and due for a pullback, traders didn't disappoint into the close on Thursday. While much of the action during the session could definitely be considered constructive from the bulls' perspective, the final 90 minutes was not as stocks sold off into the bell.

Although technicians will argue that the pullback, which at this stage has to be considered standard fare, was to be expected, the bigger concern for those looking at the macro backdrop is the return of sovereign debt contagion worries. It appears that this is one issue that refuses to fade away. And on Thursday, it was Ireland's turn to give traders pause.

First, the report that Ireland's Q2 GDP came in woefully weak at -1.8% (which was well below expectations for +0.5%) definitely got people's attention. Next, the fact that the spread on yields between Ireland's and Germany's 10-year bonds rose to a record high was worrisome. And then when the Irish Finance Minister said that some of the lenders to Anglo Irish Bank aren't likely to get their money back, the fear of what could come next on the subject of sovereign debt began to rise.

However, the fact that we got some good news on the economy here at home seemed to mute the worries from across the pond - well, for a while anyway. Although the report on Weekly Jobless Claims didn't show claims heading in the right direction, the data on Existing Home Sales and The Conference Board's Leading Index were above expectations and seemed to confirm the idea that the sky (as well as the U.S. economy) is not falling at the present time.

From a chart perspective, the key consideration currently is the state of the breakout. The bears were quick to point out the fact that the S&P 500, Midcap, Dow, and Russell 2000 indices all fell back below their respective breakout zones and as such, the trading range should now be back in play. However, you do have to squint hard to see if the S&P actually fell below the line in the sand and the NASDAQ remains well above its breakout point. So, while the odds of a "breakout fakeout" appear to have risen dramatically and we can certainly be accused of being optimistic, we're going to say the jury is still out on this one.

For those in the glass-is-half-full camp, one can argue that a pullback to test the breakout area was perfectly normal and that such a move represents what we like to call a "second chance" buy point. So, it would appear that it is time to pick your side and play the game accordingly. The bears will be looking for another trip through the range and will likely continue to short the market while the bulls may view the recent dip as an opportunity to buy.

Turning to this morning... yesterday's fear appears to have subsided a bit as the economic data in Germany wasn't half bad and our futures are pointing north in the early going.

On the economic front... The headline for the Durable Goods report shows orders decreased -1.3% during August, which was a tenth above the consensus expectations for -1.4%. And when you strip out the volatile orders for transportation, orders rose by 2.0%, which was above the consensus for +0.7%. But, the key to the report was the Non-defense capital goods ex-aircraft number (a proxy for capital spending), which rose +4.1% in August. This was well above the consensus for an increase of +2.0%.

Finally, best of luck on this Friday and be sure to enjoy the weekend!

Pre-Game Indicators

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

• Major Foreign Markets:
  
  • Australia: +0.61%
    
  • Shanghai: Closed
    
  • Hong Kong: +0.33%
    
  • Japan: -0.99%
    
  • France: +0.35%
    
  • Germany: -0.02%
    
  • London: -0.12%
• Crude Oil Futures: + $0.55 to $75.73
  
• Gold: + $2.00 to $1298.30
  
• Dollar: higher against the Yen, lower vs. Pound and Euro
  
• 10-Year Bond Yield: Currently trading higher at 2.587%
  
  
• Stocks Futures Ahead of Open in U.S. (relative to fair value):
  
  • S&P 500: +12.04
    
  • Dow Jones Industrial Average: +115
    
  • NASDAQ Composite: +20.15

Wall Street Research Summary

Upgrades:
Meadwestvaco (NYSE: MVV) - Credit Suisse
Dr. Pepper Snapple (NYSE: DPS) - Deutsche Bank
Gaylord Entertainment (NYSE: GET) - Janney Capital

Downgrades:
Kimberly Clark (NYSE: KMB) - Credit Suisse
Shaw Group (Nasdaq: SHAW) - JPMorgan
NCR Corp (NYSE: NCR) - JPMorgan
Campbell Soup (NYSE: CPB) - Morgan Stanley
Unum Group (NYSE: UNM) - Wells Fargo

Long positions in stocks mentioned: none

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

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