Stocks start Wednesday in what could be a low volume walk up to the three-day Memorial Day weekend.
With the absence of much other news, traders this week have been looking over their shoulders at the credit markets, where a rush of new debt issuance is flashing positive signs for the economy.
Stocks barely budged Tuesday, after the S&P 500 crossed above an important technical level Monday. The S&P Tuesday was down 1.58 at 908.13, at the top of a resistance range. Stocks traded on thin volume but held their ground after Monday's 3 percent rally.
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"The bears had the ball, and now the bulls appear to have stolen it back," said Art Cashin, director of floor operations at UBS. "There are people who are saying this is bear market rally in a bear market rally. But I'm not that good."
Cashin, like many, declared the market in a correction last week. He said it is now consolidating sideways. "You've got to take the May 8 highs, and we haven't done that yet. You've got to take out 930 (on the S&P)," said Cashin.
Traders Wednesday will be watching the Fed's 2 p.m. release of the minutes of its last FOMC meeting, and an update of its economic outlook. Meanwhile, Treasury Secretary Tim Geithner testifies on the Troubled Asset Relief Program (TARP) before the Senate banking committee at 9:30 a.m., and President Obama attends the first quarterly meeting of the President Economic Recovery Advisory Board, led by former Fed Chairman Paul Volcker.
The ability of markets to digest billions in new debt and equity offerings is giving cheer to traders who take it as a healthy sign. Plenty of this new issuance has come from financial firms that are increasing capital levels, some to pay off the TARP.
"There's so much stuff on the calendar, on the credit calendar, the equities calendar," said Patrick Boyle of LaBranche Financial. "You've still got money that needs to be put to work. A lot of people missed this rally."
IPOs this week are one small, bright spot for the stock market, which has managed to absorb billions in secondary offerings in the last two weeks. The latest of those was Bank of America, which priced 825 million shares at $10 late Tuesday. The stock rose in the after hours session.
Open Table, an online reservation service, prices its initial offering Wednesday. The price range was raised to $16 to $18 from $12 to $14. SolarWinds begins trading Wednesday, after its 12.1 million share IPO priced at $12.50, above its expected range.
In the worst days of the credit crises, traders lamented that the credit markets had to be fixed before the economy could mend, a necessary ingredient for a stock market recovery.
Traders lately say the healing in credit markets has become supportive for the stock market.
"I just think we've got momentum. Credit turning up is another decent catalyst, especially in the financial stocks. The credit market was absorbing all these deals -- long before people were putting these equities deals together," said Boyle.
A steepening yield curve is seen as a healthy sign and is viewed by many as a signal of economic recovery. According to Dow Jones, the gap Tuesday between the short end and long-term Treasury rates was near record levels. The gap between 2-year and 10-year Treasury rates was at 2.360 percent, the most since 2.619 points in November. The record was in August, 2003 when it peaked at 2.747.
The flood gates have been open for weeks, but now there's a virtual torrent of corporate debt issuance, investment grade and high-yield alike. On Tuesday alone, $10 billion in investment grade was on the docket, as well as another $1 billion plus in high yield. There are billions more expected in the next couple of days.
Investors have been rushing into corporates too, and it's been the trade of the year if you look at high yield. Weekly inflows into high-yield funds are ranging between $500 and $900 million and have been at the high end lately. Since the beginning of the year, "The S&P 500 was up 1.8 percent, and the Merrill Lynch high-yield master index was up 20.9 percent," said Chris Towle, director of high-yield and convertible securities at Lord Abbett.
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"It looks to me like some of the financial intermediaries are back in the market, buying selectively ... We've seen tremendous interest from the far east," he said.
The obvious appeal of corporates is their higher yields, versus new mortgages that are being issued at very low rates.
But it's the active issuance calendar that has caught the attention of traders, who are watching deal after deal get absorbed by a market hungry for more. "It's first class, defacto proof that the credit cycle is healing dramatically," said Towle.
Towle said through May 15, there was $54 billion of investment grade paper issued for the month of May alone. That was up from $38 billion for all of April. "Credit markets are open. It doesn't mean anyone can borrow. It doesn't mean they are lending money to subprime again. It's working. It's becoming unthawed," he said.
The deals have come fast and furious. "A lot of stuff being announced is coming out of the blue, like Warner Music's secured bond was announced this morning, and it was done this afternoon," Towle said. State Street, Barclays and Capital One were all selling debt Tuesday.
Verizon was also in the market with a $4 billion offering of two-year fixed and floating rate notes, needed to repay the bridge loan on its Alltel deal.
Towle said the trend is stunning. "We were looking for this, and nobody's been aggressive enough because it's been unfolding so quickly," he said. Some traders have said the rush of offerings this week is due to the holiday shortened trading week next week.
But Towle said CFOs are now racing to the debt market and they are coming from a range of industries. "The markets are open, and they have to be opportunistic and raise capital when they can in case the credit crunch comes back in a double dip form. But I don't think it will," he said.
"I don't think people really know how much change has taken place," he said.
Disappointing housing starts nipped an early stock market rally Tuesday, but Diane Swonk, chief economist at Mesirow Financial, said those numbers were actually positive in that they showed a bottoming process. She said they should hit bottom by early summer.
The Fed's Federal Open Market Committee issues the minutes of its last meeting and its economic outlook, covering three years.
Swonk said she will be looking at the further out data with an eye toward where the Fed sees the economy reflating. "Their current forecast is pretty conservative. They're looking for modest growth at the end of the year," she said. For 2010, she said they probably will look for growth of between 3 and 4 percent.
"They're hoping this is the bottoming quarter," said Swonk, but she noted that some of the data for May could start to look weaker. Industrial production is one of those weak spots. "Some things went bad in April and May," she said, adding she has revised down her GDP estimate for second quarter to minus 1.5 percent.
"It can be bottoming, but bottoming is very tough," she said.
Japan, meanwhile, said early Wednesday its economy sank 4 percent in the first quarter, its biggest contraction on record. The number though was below the 4.2 percent decline expected.
On the corporate front, Deere, Target, Toll Brothers, BJ's Wholesale and Ann Taylor report earnings before the bell. Computer Sciences, Intuit, Limited Brands and PetSmart report after the close.