DJIM #30 2011

A lot of debt ceiling fear mongering over the weekend has gapped down ES at futures open.  It’s no surprise the ‘unthinkable’ outcome is gaining traction as informal July 22 deadline falls without a deal. But, judging the treasury/bond market of late, we’d say the only unthinkable was if there was no NFL season!.  We’d continue to look at the TSY/bond market for what the market really thinks on the issue and inevitable outcome. Still, rating agencies will eventually downgrade US ratings even if a compromise is reached as it will not reach expectations of the agencies.

Aside from the US political mess, US earnings will be heavily followed on a more single stock basis because the market pretty well can see overall trends in most areas of the economy as most important companies/sectors have reported (financials, industrials, tech).  Notably, a dislocation in mega caps vs. small/mid caps earnings is seen by the lagging RUT late in the week.  Also, most of the gains in SP is dominated by only a handful of stocks like APPL,GOOG.  All in, IBM/GOOG have set a high bar and hence a lot of fading of inline reports and/or blow ups have occurred due to higher expectations.  At some point this trend will end and that is something to monitor to see if sidelined buyers are stepping up.

Shadowlist

Earnings Q3 linked-  added ACTG and DTLK  to Shadowlist following earnings. ACTG is also an under radar play on IP/patents fever since Nortel’s portfolio sale.

Into the trading week, (Nov7- )

US vs. EURO'world

Although SP gave up >2% on the week on rapidly changing European headlines, bias/direction remains to the upside for risk markets. Market is seemingly taking Euro risks in stride last week(fatigued) on lack of concrete announcements/progress from last weeks summit, life goes on seems to be prevailing as it has since this all began 2 years ago (esp. relating to Greece/EFSF leveraging). A fresh and likely biggest wary to look at is Italian bonds/yields. ECB is intervening holding it below critical 6.5%, if it gets above it may trigger margin increase changes and the consequences (financial stresses) are inevitable and are unknown. After filtering all the Euro noise out this is likely most critical. Still, amazingly market is not so alarmed by Italian yields at these high levels giving credence to calmness/taking this in stride as well, which allows for any positive developments on this front to rally market.

Despite October rally, risk is underweight as most remain bearish. Performance chasing in risk is a good possibility into year-end, if European downside risk is reduced or at least the perception that it is for the time being. Improved US economic data and earnings is also offsetting Sovereign debt crisis noise as US double dip/recession fears have receded, while larger European economies confirmed a slide into recession last week (as expected this Q). (again)Italian 10yr’s must be kept in check for the offset to continue.

SP technical look for (limited) upside with a decisive break over 1275, Italian yields below <6% would likely calm fears and allow such a move. On downside, SP 1220-1230 and afterwards 1193 is the level to watch for support.

Earnings related stocks from last week:

N, SBUX, HANS, IACI, CVLT (cloud names N,FFIV, DTLK etc. acting well since EPS’), SIMO, MELI, FIO (caution: thin volume and competition coming make it volatile), EL, MDRX, CLH. *Some of these names are at double top levels.