Tuesday, January 11, 2011

Market Outlook - Monday Jan 10

US equities started on a soft note Monday but strengthened as the session wore on. This is a pattern I have been seeing repeatedly as of late, an indication that the bulls are still buying each and every dip. US weakness was precipitated by lower overseas markets and China reporting a decline in its trade balance (to $13.1 billion in December from $22.9 billion in November). Also setting a bearish tone were renewed concerns that further bailouts may occur in Europe.

This week may bring more news from Europe as a number of debt auctions are scheduled in Portugal, Spain, and Italy. The European Central Bank has recently been buying Portuguese government bonds and Irish securities. Austerity measures in several countries are believed to slow the pace of European growth.

There was some M&A activity in the US market Monday: Duke Energy will purchase Progress Energy (PGN) for $46.48 per share. DuPont agreed to acquire Danisco for $5.8 billion. As well, Playboy will go private for $6.15 per share.

Tech stocks overcome early weakness to close in the green, with Apple pulling the Nasdaq 100 higher yet again.

After the bell, Dow component Alcoa kicked off the unofficial start to another earnings season (which will not come into full swing until next week, however). Yet again, Wall Street is anticipating stronger-than-expected earnings. Alcoa beat expectations for earnings per share, but its stock weakened in after-hours trading.

I have known and previously shared with my subscribers the following “Monday - Friday Effect” report regarding the equity markets tendency of rallying late on Friday and into Mutual Fund Monday for many weeks,. Last week, I chimed in calling it the “Monday - Friday Effect.”  If you bought every Friday close last year, and sold the Monday close, your return so far would be 14.20%, versus a 0.42% return on the S&P 500. Virtually all the gains would accrue at the Monday morning gap opening. If you did the reverse, bought the Monday close and sold the Friday close, then your YTD loss would be 11.00%. Apparently, the market is paying a huge premium for traders willing to run the weekend risk, which during the financial crisis, is
when all the disasters occurred. I know of several desks and traders that have been working
this trade for a long time.

As we march into the new year its not the “Friday - Monday Effect” that I am worried about. It’s another factor that hasn't affected the markets up to this point and its called SENTIMENT. With most mutual funds fully vested the prospects of a brand new 12 months has people concerned that they can’t go up all year. The first hurdle will be the 4th Qtr earnings.  Investors moved $9.27 billion into equity funds in the week ended Jan. 5, the biggest inflow since June (FYI JUNE SPX 1070), while $9.6 billion exited money market funds. Last week, Goldman raised their forecast for the S&P 500 to 1500, BlackRock to 1350, Barclay’s to 1420, and Citigroup and Bank of America to 1400. Most think that any early year pull back will only produce more upside. What’s made the equities a hard game is you can really feel the anxiety on the downside. Traders are anxious because all the sells offs over the last few months (Fridays’ 16 handle sell off) have been
greeted with waves of buyers and the late sellers have gotten burned.

1 comment: