EmailIt is said of star players that you can't stop them; you can only hope to contain them. In that same vein, we can't stop the market; we can only hope to explain it.
Our simple explanation for the late-day rally yesterday, which saw the Dow surge nearly 200 points in the last hour, is that it is beyond any clear-cut explanation.
Some will point to rumors surrounding positive eurozone developments; some will cite technical factors; and some will cite end-of-quarter portfolio rebalancing. Heck, someone might even try to push the idea that the market rallied because a butterfly flapped its wings in Asia.
We don't know and it is futile to try and provide a concrete explanation. The volatility is simply par for this market's course.
Fittingly, the market looks poised to give back all of yesterday's gains when the opening bell rings. The S&P futures are down 14 points and are trading 1.0% below fair value.
The cause-and-effect spin is in full swing.
Some are pointing to the HSBC Manufacturing PMI for China, which contracted for the third straight month in September, never mind the fact that the 49.9 reading was an upward revision from the preliminary reading of 49.4. Some are citing a weak retail sales report in Germany. Some are citing lingering concerns about growth prospects in the U.S.
From our vantage point, we have been struck by the acknowledgment that the Slovak Republic hopes to hold a vote on the expanded EFSF facility within three weeks but that such a timeline cannot be guaranteed. This admission is par for the eurozone's course as it is a stark reminder that crisis management is not exactly the eurozone's strong suit.
In addition, Ingersoll-Rand (IR) issued a Q3 and FY11 earnings warning that was attributed to lower than expected demand levels in its key North American residential and commercial security markets and a strengthening dollar. There haven't been many notable warnings to date, but the demand issues IR acknowledged are likely to create some angst that more warnings from other companies will be heard in coming weeks.
Another drag this morning is the Personal Income and Spending report for August. According to the BEA, personal income decreased 0.1% while personal spending rose 0.2%. The latter was in-line with the Briefing.com consensus estimate, although personal income was projected to increase 0.1%.
Real disposable income was down 0.3% and real PCE decreased less than 0.1%.
The personal savings rate slipped from 4.7% in July to 4.5% in August. The core-PCE price index, which is the Fed's preferred inflation gauge, increased 0.1% and is up 1.6% year-over-year. The Fed's central tendency projection for core PCE inflation in 2011 is 1.5% to 1.8%.
Separately, there were downward revisions to income and spending for July, which will create a slight drag on Q3 GDP estimates.
The Chicago PMI (Briefing.com consensus 54.0; prior 56.5) and the final reading for the University of Michigan Consumer Sentiment Index for September (Briefing.com consensus 57.5; prior 57.8) will be released at 9:45 a.m. ET and 9:55 a.m. ET, respectively. These reports could move the market.
For the time being, there is a negative disposition that will translate into losses for the equity market when trading begins. After that, we'll just have to wait and see if a butterfly flaps its wings.
--Patrick J. O'Hare, Briefing.com
Patrick J. O'Hare is Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial, please email researchsales@briefing.com.
