Market Talk

Lot of ground to cover in today’s show: big stock rally, earnings, the falling dollar and the rising (very, very slowly) yuan. Today’s special guest is Mike Ryan, chief investment strategist at UBS Wealth Management.

Okay, so yesterday the world was about to spin off its axis, the end-times were nigh, disaster seemed afoot. Even Charlie Sheen was putting on a credible stage show.

Today, not so much.

US stocks recover after yesterday’s sell-off, with Johnson & Johnson leading the Dow higher after a well-received earnings report. Given how quickly stocks shook off that S&P warning, which yesterday seemed a globe-rattling event, you wonder if yesterday’s sell-off in the stock market had as much to do with S&P’s report as it did with an overbought market.

DJIA gains 65 (0.5%) to 12267, S&P 500 rises 7 (0.6%) to 1313, Nasdaq Comp adds 10 (0.4%) to 2745. NYSE volume’s low. J&J, Caterpillar comprise about half of the Dow’s gains. J&J, Goldman both see earnings slide from a year ago, although the Street rewards the former and punishes the latter.

Gold touches $1,500, closes a hair beneath there. Crude’s above $108/barrel again. Yen remains pegged above 82 to the dollar, but watch if it breaks below there (moves down in the yen represent strengthening.) We’d be getting back to the range that sparked the yen’s wild March 16 rise and subsequent G7 intervention.

Slate of post-market earnings includes IBM, Yahoo and Intel.

Despite the recovery today, the technical damage yesterday was material, as our colleague Tomi Kilgore points out:

The S&P 500′s bounce was encouraging for bulls, but it didn’t quite erase the negative overhang created by Monday’s tumble. The S&P 500 up 7 at 1313, but below resistance at the 50-day moving average (currently at 1315). While the index stays below the 50-day MA on a closing basis, the preferred stance will be sell on rallies, as Monday’s slide stirred up technical chatter about a possible longer-term “double-top” reversal pattern (February top of 1344, April top of 1339). That won’t be confirmed unless the index falls below the March low (1249), but the longer the index closes below the 50-day MA, the more likely it becomes.

Now, for sheer lunacy, absolutely nothing tops this story from the Orlando Sentinel about a central Florida unemployment bureau and its latest plan to, well, fight unemployment: they’re giving out “superhero” capes.

It sounds like a bad Saturday Night Live sketch, but we’re not kidding. Here’s the website of the Workforce Central Florida, which launched a marketing campaign to “help us fight Dr. Evil Unemployment.” It’d be hysterical if it wasn’t so sad. Nothing quite says “we’ve hit the wall” than this effort.

Let’s start putting some of the pieces of this puzzle together, shall we?

The news has been almost uniformly bad the past two weeks, unless you were the one person in your office pool who had Virginia Commonwealth. But stocks have been on a tear. Why, exactly?

We have a few facts from which to start constructing a theory:

- On March 16, the yen spiked, reaching Y76 to the dollar. The next day, finance ministers from the G7 nations held a conference call and agreed to intervene in the forex markets to put a cap on the yen.

- The DJIA and S&P 500 hit their year low on March 16.

- The yield on the U.S. 10-year Treasury note hit a year low of 3.20% on March 16.

Since March 16:

- The yen has appreciated no further, and currently resides around Y82.88.

- The DJIA is up about 6.5%. The S&P is up about 5.8%.

- The 10-year Treasury yield rose as high as 3.49% on Tuesday. Through Tuesday, it had risen every session since March 16, a streak that has not occurred since 1990.

Do not think these various things are unconnected. March 16 was a pivotal day in the global markets.

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Stocks had a strong week, bolting higher in a stout rebound after the sell-off instigated by Japan’s earthquake/tsunami/nuclear crisis nightmare. A nightmare that’s still ongoing, by the way.

Oil didn’t move much today, but energy stocks led the way, along with the material and industrial sectors. IBM, CAT, Chevron and Exxon Mobil account for almost 80% of the DJIA’s advance. DJIA rises 50 to 12220, Nasdaq Comp adds about 6 to 2743 and S&P 500 grinds out 4 to 1313.80.

What’s most impressive about the week’s gains is that they came amid a cascade of unpleasant headlines. Leaking radiation; European debt problems flaring up again; horrendous housing data; weak durable goods orders; another commitment by US military forces as civil war rages in Libya; spreading unrest in Middle East and North Africa; and oil prices marching higher. And of course, that air-traffic controller sound asleep in the DC tower. Horrifying. Continue reading…

Do yourself a favor and look at the top headlines on WSJ.com this morning. They are uniformly bad. Not a bright spot in the bunch. Bombings in Libya, radiation in Japan, chaos in Portugal, a slide in durable goods orders here in the U.S., a downgrade to Spanish banks.

Okay, the jobless claims fell. You got us. But you may be wondering to yourself, what’s holding this market up? You’re not alone. Even one of the most savvy market watchers we know can’t find any good reason to explain why the market’s rising.

UBS’ Art Cashin, in his morning comments today, calls it the “Dorothy Gale rally,” as in Dorothy from the Wizard of Oz. In other words, all it takes is a little magic.

Nowadays, I’ve started to refer to the up-move as the Dorothy Gale rally.  Dorothy and her little dog, Toto, got swept up in an awful tornado only to land in a place that looked peaceful and quite wonderful (although it was imaginary.)

These days, traders, much like Dorothy look out their windows (which are computer screens.)  Sometimes they are filled with rioting mobs, firing tanks and falling buildings.  For Dorothy that would be like seeing a chicken coop, a park bench or a church steeple whiz by.

So, if you are Dorothy and you look out the window and there are no benches flying by, it might be a good day.  Maybe it would be okay to go outside and play with Toto for a little.

Yesterday, there were no benches flying by.  The world was not at peace – far from it.  But the flying benches were on the other side of the mountain and, thus, not so readily visible.

Instead, past your window strolled Laszlo Birinyi who hinted the yellow brick road that we call the S&P might be a longer road than many thought.  And Warren Buffett teased with Becky Quick that there might be some bargains out there too big even for him to pick up.

Also, passing by were folks like Bill Miller who said stocks were probably 20% undervalued.  And then Leon Cooperman said “stocks were the best house in a good neighborhood.”

So, with no flying benches and lots of cheery neighbors, Dorothy and Toto left the dark bedroom around 11:00 (yesterday) and went out to frolic in the meadow, midst the spring flowers for the rest of the day.

So there you have it. Click your heels three times, say “there’s no place like home,” and soon enough your portfolio will look just like Warren Buffett’s. You’ve had the power all along.

We still don’t know all the ramifications of Japan’s triple disasters on the global economy. We don’t even know if the pumps will work at the battered Fukushima Daiichi reactors. We don’t know how long the Jasmine Revolution will last, or how bad or how violent it will be ultimately. Another regime seems poised to fall this morning, in Yemen.

There’s a world’s worth of unknowns out there, but the bulls  have been assured of one very important thing:  the Fed is still buying the drinks.

It’s easy enough to ignore a world of perils when somebody else is picking up the tab. The Fed is plowing ahead with its bond-buying program, the so-called QE2 that runs through June, and is going to pump $600 billion into the economy come hell or high water (both of which, lamentably, have appeared on the world stage lately.)  The Fed can’t force people to buy stocks, but it can throw a lot of free money around, and it can force down the interest rates on safe havens, and “encourage” investors to venture out on the risk curve.

So is it so surprising that the stock market is ignoring what appears to be a world very much on fire? And what happens when the Fed decides it’s time to settle the bar tab?

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Look, we get it. Markets like to rally. Markets like to rally on Mondays, especially on Mondays when there’s a big, juicy M&A deal on the table that gets everybody all jazzed up. Then add in some dry oversold tinder on a Monday after a couple of weeks of persistent sell-offs and this is what can happen.

The Dow is up roughly 200 points, back around the psychologically and technically key 12000 level. The S&P poked its head above 1300. The Nasdaq Comp is up 2%. It’s a risk-on day without a doubt, and investors are piling on.

Let’s keep a little perspective here. Maybe we’re missing something, but the day seems a little thin on “good” news, while stocks base their gains mainly on big M&A and oil marching higher again.

- For starters, the situation at Fukushima Daiichi remains dangerous. The level of damage still isn’t clear, how much melting down there actually was, and what the ultimate solution will be.

- Portugal, one of the nations that supposedly wasn’t Greece, is looking more and more like Greece. Reports are the nation may seeks a bailout by June at the latest, if not earlier. That’d make three European nations on the bailout register.

- The fight in Libya is looking murkier by the day, with what now seems like a hastily arranged no-fly zone putting the western powers into the conflict, without a clear goal or exit strategy. Crude oil prices are reflecting the uncertainly not only in Libya but across the Maghreb and Middle East, rising back over $103/barrel.

That enough risk for you? How about we drill down a bit further?

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US stocks drop sharply on a nasty mixture of bad news (jobless claims, trade gap, China’s trade gap, Spain’s downgrade,) which puts the market’s rocket trip since August in jeopardy.

DJIA slides 228 (1.9%) to 11985, its first 200-point one-day drop since August. S&P 500 loses 25 (1.9%) to 1295, Nasdaq Comp drops 51 (1.8%) to 2701. It was the Dow’s biggest one-day point and percentage drop since Aug. 11. The index just barely managed to close above its 50-day moving average of 11980, and the close below 12000 is a big red flag, as it roughly represents the uptrend line that stretches back to the August lows.

To be fair, just about every risky or even somewhat seemingly risky asset — crude, cotton, the euro — fell as well; safe havens like Treasurys, dollar and Swiss franc did well. Crude tumbled sharply, although at $102/barrel, it still remains painfully high for the average consumer. Brent is at $115, not far off the nearly $120 high it hit recently.

Look, a big sell-off was coming, no doubt about it. The question is, what happens next. A lot of attention’s going to be on Saudi Arabia tomorrow, where protesters are planning a big showing. Markets slumped badly when the first headlines crossed the Tape saying Saudi police fired on protesters. Later reports said the police fired rubber bullets, not real ones, although with the House of Saud having banned any and all protests, and with the protesters trying to mount a “day of rage” tomorrow, tensions are already high.

Here’s some background from the WSJ:

The police action in Qatif comes a day before a “day of rage” protest called for by a Facebook page that has attracted thousands of fans. While most analysts are skeptical of the idea that large numbers of Saudis will hit the streets on Friday, they point out that the country suffers profound structural unemployment which could spur discontent.

Despite a few small protests last month outside the Eastern Province – including demonstrations over inadequate flood defenses in the kingdom’s second city of Jeddah – the most prominent expressions of dissatisfaction have taken the form of petitions and open letters to Saudi Arabia’s ruler, King Abdullah.

Most people still think the odds of a widespread uprising in Saudi Arabia are small. Of course, most people didn’t think any uprisings, at all, anywhere in the Mideast or North Africa were possible even two months ago.

All you need to know is that the more you see the words “revolt” and “Saudi Arabia” and “$200 oil” in the same sentence, the more worried you should be.

Okay, let’s have a show of hands: who thought Europe’s sovereign-debt crisis was over? Anybody? Bueller? Bueller? Who’s that with your hand up? In the back?

Oh, it’s you, Mr. Market. Mr. Market, tsk tsk.

Today’s sell-off is being pegged in some part on Moody’s downgrade of Spain, which “reignited” fears of that Europe’s sovereign-debt problems are still, well, problematic. You can almost forgive the market for taking its eyes off this particular ball. After all, the Fed’s been buying the drinks since August, and the market is never one to look that gift horse in the mouth.

Then, too, the news this past month or so has been dominated by the Jasmine Revolution spreading across North Africa, and there’s been a recovery here in the U.S., the sustainability of which is a constant source of obsession (and rightly so.) And the Charlie Sheen thing’s been going on for years. At least, it feels like it’s been going on for years.

But it’s hard to believe that the market was really shocked by the Spanish downgrade. The fact is the U.S. stock market is due, overdue, for a correction, and even despite the central bank’s best efforts, one is going to come. Call it gravity. The news, the trigger for the sell-off, it’s just an excuse.

To be sure, there was a notable confluence of bad news today. Besides the Spanish downgrade, there was a surprising jump in jobless claims, and a surprising widening of the trade gap. These two combined to take the enthusiasm over the economy recovery down a few notches (no surprise to regular readers of this blog, to be sure.)

But the fact is, stocks are and have been overbought for some time now, and the recent reappearance of that particular species, the retail investor, that seems to come out the most at market tops only made the market even more top heavy. Woe be to the last one into a crowded trade.

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You had to know this was coming.

US stocks nosedive at the open, and you had to know this was coming because stocks have been pushing down on the uptrend for a few weeks now.

Yes, the jobless claims data and trade report were disappointments, and point to some weakening in the economy, but it’s not like they were shocking.

Crude oil futures, too, are actually falling this morning, lately under $103/barrel. So it’s not oil.

Pressure’s been building up in stocks, and with all the erratic trading lately, a sell-off’s to be expected.  The real question is whether this one’s big enough to break the months-long uptrend. There’s an awful lot of time to the closing bell, and we could see this morning’s sell-off wiped out before then.

Funny, just as mom and pop were coming back to the market, the market’s selling off. Funny how that happens, isn’t it? Newswires’ Tomi Kilgore penned this missive this morning:

The stock market’s weakness hasn’t broken through some key support levels just yet, but TrimTabs Investment Research says it “seems to have spooked mom and pop.” Retail investors redeemed $3.1B from US equity mutual funds in the week ended March 2 after adding money in January and most of February. Meanwhile, bond funds took in $10.5B the past three weeks, says TrimTabs, a sign investors are seeking safe-havens again. DJIA down 189 at 12024. An uptrend line starting at the August lows and the 50-day moving average both come in around 12000-12010.

This morning’s low so far is 12012.91, so you can see that there’s some support at that level, and the trick for the bulls will be to keep things north of there through the closing bell. As I post this, the Dow is down 194 at 12017. So it’s being tested.