Market Stats

Stocks faced a Labor Day weekend hangover as the major U.S. averages lost just over 1%. Investors were yet again facing concerns over the strength of Europe's banking system and renewed worries over a potential default. Strikes in France and London only intensified the focus on Europe. The U.S. dollar strengthened against the euro and money rushed back into the U.S. bond market after last week's sell-off. The yield on the 10-year note dropped to 2.6%. Gold gapped open higher and closed near all-time highs at $1,259 an ounce. Crude oil slipped -0.6% to $74 a barrel. It was a bullish day for some of the agriculture commodities with coffee futures up +2.8%, oats +2.7%, and sugar up +4.1%.

Asian markets were mixed. Investors were reacting to news that both the Bank of Japan (BoJ) and the Central bank of Australia both decided to leave rates unchanged (versus raising them) due to fears of a second half slow down. Both countries pointed to weakness in the U.S. as a concern. Australia was also causing a stir after Prime Minister Julia Gillard was re-elected for a second term and promised to raise taxes on companies with mining operations in Australia. Mining stocks naturally turned lower on the news.

Politics were also fueling uncertainty in Japan as the markets wait for the Democratic Party's leadership election on September 14th. The Japanese NIKKEI index snapped a four-day winning streak with a -0.8% decline. The Hong Kong Hang Seng index gained +0.22% while the Chinese Shanghai index closed virtually unchanged at +0.08%.

Profit taking was worse in Europe. Germany reported that factory orders declined -2.2% in July from an upwardly revised +3.6% gain in June. Economists were expecting a +0.5% rise. While this is the biggest one-month drop in over a year keep in mind that Germany just had its best quarterly growth in 20 years. Orders were still up +18% compared to a year ago. The German DAX index closed down -0.6%.

Millions of workers went on strike in France today protesting various austerity measures and a government proposal to raise the retirement age from 60 to 62. France's Interior Ministry put the number of demonstrators at 1.1 million while the CFDT union said it was closer to 2.5 million. French leaders argued that it could be worse with several neighboring countries thinking about raising the retirement age to 67 or 68 years old. Meanwhile in London most of the subway system was shutdown as workers launched a 24-hour strike over job cuts. It was a busy day for the bus system. Unfortunately for Europe there are more strikes to come. This Wednesday there will be a strike by transportation workers in Greece. On September 21st there is a protest planned in the Czech Republic over a 10% pay cut for government employees. On September 29th Spain is expecting another labor strike. In spite of the strikes the biggest story on Wall Street was concern over the European banks but more on that in a moment. At the end of the day the English FTSE lost -0.58%. The French CAC-40 fell -1.1%, both ending a multi-day winning streak.

The big story today was concern for the European banking system as word surfaced that the highly questionable stress tests over the summer masked how much risk the banks actually had to toxic sovereign debt. You may recall that the European stress tests this past summer were big on hype and low on details. They were widely panned as being too lenient. Of the 90 banks reviewed only 7 of them failed the test.

Now it seems the largest banks may need to raise another 134 billion euros worth of capital to cover potential losses from their risky sovereign assets (mostly Greek, Portuguese, and Spanish bonds). Over the summer there was rising concern as European banks were unwilling to lend to each other. If the banks don't trust each other why should investors? Investors are once again voting with their money. The yield on a 10-year Greek bond has surged to more than 11.2%, which is a clear indication that investors are demanding more reward for the substantial risk that Greece may eventually default. Yields on Greek bonds haven't been this high since just before the EU and IMF agreed on a bailout for Greece.

Doubts are also rising for Ireland with yields on Irish bonds surging. The spread between Irish bonds and German bonds has hit 20-year highs. There is growing concern that a single default by one country (whether that's Greece, Portugal, Spain, Ireland, or Italy) will create a domino effect that will wipe out the banks and spark additional sovereign defaults. Unfortunately the IMF claims European banks continue to look weaker than their U.S. rivals since Europe's banks have only written down about 3% of their troubled assets versus 7% for U.S. banks.

Back at home in the U.S. the markets were digesting President Obama's Labor Day speech at a rally in Milwaukee. Obama is proposing a $50 billion, six-year plan to overhaul the U.S. transportation system. Eventually the overhaul would cost more than $50 billion but it would rebuild 150,000 miles of roadway, build or repair 4,000 miles of railroad, build or renew 150 miles of airport runways and provide better air-traffic control systems. The plan also wants to develop a high-speed train system. The President claims this new transportation plan will create jobs and will not increase our deficit but he failed to outline how many jobs it would create or how we could pay for it.

The initial reaction to the six-year overhaul seemed doubtful that Obama could get this plan passed through Congress. However, Wall Street was naturally more optimistic about his proposed tax cuts. The President will speak tomorrow in Cleveland where he will outline new rules that enhance a business' ability to depreciate equipment. Obama is also set to propose a permanent extension to the research tax credit.

The most sensational headline today was news that technology giant Hewlett-Packard (HPQ) is filing a lawsuit against its previous president Mark Hurd. A few weeks ago Hurd resigned from HPQ over sexual harassment accusations. Yesterday Oracle (ORCL) announced it was hiring Mark Hurd as president of the company to report only to Larry Ellison and the Board of Directors. HPQ immediately filed a lawsuit to prevent Hurd from accepting this job. Hewlett claims that as the previous president of HPQ and as the new president of ORCL it would be impossible for Hurd to not "utilize" or "disclose" sensitive trade secrets he knows from working at HPQ. Thanks to Hurd's leadership HPQ has grown from a major hardware producer to include data-center technology and other enterprise solutions - two areas that bring it head to head with ORCL. Shares of HPQ were down -1% while shares of ORCL rallied +5.8%.

After hours shares of ZymoGenetics (ZGEN) almost doubled with a rally to $9.80 a share on news that BristolMeyers Squibb Co (BMY) was buying the company for $9.75 a share (about $885 million). Shares of BMY are not moving on the news but look poised to breakout over resistance near $26.75. In other news Altera (ALTR) is showing some after hours strength after the company raised its third-quarter revenue guidance from +4%-8% to +10%-14%. Shirt-maker Phillips-Van Heusen (PVH) reported better than expected earnings after the closing bell. Wall Street was looking for a profit of 54 cents. PVH delivered 72 cents a share on revenues of $1.1 billion. PVH also raised their EPS guidance to $3.70-3.80 for 2011 versus consensus estimates of $3.62. The stock is not seeing much of a move in after hours.

Technically the market was looking a little short-term overbought with a rally from 1040 to 1105 (+6.2%) in the S&P 500 in the previous four days. Giving back a -1.1% decline isn't that bad but it does look like the S&P 500 is failing at its simple 100-dma. If you're market outlook is bullish then watch for support near 1080. Not only is the 1080 level previous support and resistance but it is also a 38.2% Fibonacci retracement of the S&P 500's early September rally. If the 1080 level fails then look for support near 1065.

Intraday Chart of the S&P 500 index:

Daily Chart of the S&P 500 index:

The NASDAQ's rally has failed near the bottom of its early August gap down. The 2200 level should offer some short-term support and if that fails then the 2150 and 2100 levels. Technicals on the NASDAQ are mixed. I would keep an eye on the SOX semiconductor index as a leading indicator. The SOX has been trying to find a bottom the last couple of weeks but it looks like the oversold bounce is failing near prior support (now new resistance).

Chart of the NASDAQ index:

Chart of the SOX semiconductor index:

The small cap Russell 2000 index, which saw a rally from 590 to 643 (+8.9%) was one of the worst performers with a -2.1% decline on Tuesday. A traditional pull back toward the 38.2% Fibonacci retracement would suggest a dip to 622 while a 50% correction would bring the $RUT back to 616. Personally, since the $RUT tends to be more volatile than the rest, I would look for a pull back toward 616 or 610.

Chart of the Russell 2000 index:

Tomorrow afternoon the market could move on the Federal Reserve's Beige Book report. The report is only published eight times a year and provides anecdotal evidence of business activity for each Fed district. The last report said economic activity has continued to increase but gains were "modest". Here's a link to the last report from July 28th, 2010.
Most Recent Fed Beige Book Report

Markets will also be focused on Thursday's weekly initial jobless claims. Economists are expecting 470,000 new claims compared to 472,000 the prior week.

Overall it looks like stocks were due for a little pull back after last week's impressive bounce. The question is will traders buy the next dip? After a frustrating summer the better question might be, are fund managers in a mood to buy stocks or clear their books (sell) and wait for the next entry point? This will depend on economic data and the elections. If economic data improves and the threat of a double-dip recession recedes then stocks will likely climb. If economic data disappoints then investors will struggle for a reason to buy. Yes, it's true that on a valuation basis the S&P 500 is cheap at 12 times earnings but that doesn't mean it can't get cheaper. Given the trend of analysts lower their second half 2010 and full year 2011 estimates I think odds are pretty good we might see another decline ahead of the November elections. Then again stocks might be range bounce until the mid-term elections. The stock market hates uncertainty and until the votes are counted there will be an incentive to sit on the sidelines. After the elections, assuming economic data isn't unraveling, the market should have a bullish bias.

-James