Market Commentary

Stocks traded lower again.
October 29, 2009

Stocks traded lower again.  Like many I believe profit taking is necessary.  Will the Dow trade to its 50-day moving average of around 9700?  Or will stocks decline to around 9250, the 100 day moving average?  Such a decline would represent a 4.1% and 8.5% fall, respectively from the Dow’s mid October’s yearly high.

As noted many times in the aggregate both earnings and economic statistics have been greater than anticipated.  As per Bloomberg a record 82.3% of the S & P companies that have posted results have exceeded expectations.   This is the third consecutive quarter of positive surprises but unlike the two previous reporting periods that were met with soaring stock prices, stocks have declined.  As per Bespoke Investment this is the worst monthly performance following overall positive earnings surprises since the inception of this data point in 2001.

Can we suggest this is a classic case of buy on rumor and sell on fact? 

Can I suggest stocks are fearful of change in monetary policy, an eventuality I think will occur sooner than most expect?  Not only are interest rates the largest component of most valuation formulas I think the fear is intense that this incipient recovery will die when the Central Bank begins withdrawing the massive amount of liquidity it has added to the financial system.

Or can a case be made the recent decline is a function of mutual fund and hedge fund selling whose fiscal year ends in October?  It appears the stocks that have the greatest year to date gains—energy, financials, commodities, manufacturers—is bearing the greatest blunt of the selling.  Are managers attempting to lock in profits in order to pay some gains?

As noted many times I am not aware of another time when the outlook for economic activity has been as diffuse as today. Speaking of which, third quarter GDP is announced today at 8:30.  The string of four consecutive quarterly declines in GDP is expected to come to end last quarter thanks for a large part to the success for the cash for clunkers program.

Consensus is expecting the economy to grow by 3.2%, the quickest pace since the 3.6% rate experienced in September 2007.  Estimates range from 3.0% to 3.7%.

However the question at hand what is the momentum of the economy?  The answer to this question can assist in answering the above questions.

I reiterate my long held view that growth will exceed expectations for the simple fact comparisons will be easy.  Moreover it is human nature to extrapolate yesterday’s activity into today.

Last night the foreign markets were down. London was down 0.29%, Paris down 0.15% and Frankfurt up 0.01%.  Japan was down 1.83% and Hang Sang down 2.28%.

The Dow should open moderately higher but this could change given the significance of the upcoming data.  The 10-year is off 2/32 to yield 3.42%