Trader Talk

Do We Have A Tired Market?

Interest rates and the dollar are proving to be real wild cards for stocks.

1) Higher interest rates. Stocks weakened as yield on the 10-year broke out to the highest levels since August.

2) The dollar. It is rather ironic that when asked about scenarios that could reverse the market rally, traders typically mention a "sudden, disorderly drop in the dollar."

Ironic that today, a sudden RISE in the dollar is producing a concurrent decline in stocks as well.

That's because the dollar's role in the carry trade is exacerbating it's movements. The dollar is replacing the yen as the preferred currency in the carry trade. So traders borrow cheap dollars and use them to buy higher-yielding assets elsewhere.

When something happens that moves the dollar up a little (like higher rates), it exacerbates the dollar move because traders are short the dollar due to the carry trade and the process of short covering creates additional upward pressure on the dollar.

But so far, setbacks have turned out to be buying opportunities.

1,100 on the S&P 500 has proven to be a tough ceiling to break through; every time we have come near it in the next two weeks we have failed.

The average correction since the March low has been about 4 percent, the worst was 7 percent in the June-July period.

This recent "correction" of the past week has left us 2 percent off the recent highs.

What stocks need now: higher earnings and topline prospects. Right now, consensus for 2010 earnings on the S&P 500 is about $74; if you apply a "normal" multiple of 15 times earnings, you are right at 1100, which is where the S&P is right now.

In other words, corporations need to convince the Street that the prospects for 2010 are a little brighter than they are now.



Questions?  Comments?