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Ahead of Wall Street - August 21, 2012

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Tuesday, August 21, 2012

Today’s trading action will likely be not much different from what we saw on Monday when stocks hovered around the starting point and not that far from the highpoint of the year set in April. But it wouldn't take much to push stocks above the previous highs. Whether stocks continue the impressively smooth gains of the last few weeks or succumb to gravity would depend on answer to a simple-looking question - what has been driving the uptrend? But appearances could be deceiving as the answer to this question is far from simple.

Not much has changed in recent weeks on the questions about the international scene (Europe & China), so it seems reasonable to look for the market driver on the home front. But is the market pricing in an end to the Spring/early Summer economic soft patch and a resumption of the ‘muddle-through growth’ in the 2% vicinity in the back half of the year and beyond? Or has it already factored in another round of quantitative easing from the Fed?

It has got to be an either/or proposition given the mutual exclusivity of the two options. If it’s the latter (the QE scenario), then one can easily envision stocks losing ground in the coming days as the Fed fails to meet the QE expectations. We may not get more clarity on that front from Wednesday’s minutes of the last Fed meeting as some of the more healthier economic data followed the last FOMC session. At a minimum, we will have to wait for Bernanke’s Jackson Hole speech later this month to get more clarity on the Fed’s latest thinking. But things will definitely be a lot clearer by the time the Fed meets again in mid-September as by then we will have the August non-farm payroll report in addition to a host of other key economic readings.

In corporate news, Best Buy (BBY - Free Report) came out with disappointing results this morning even as the market continues to make sense of the new CEO appointment from beyond the retail sector. Unlike Best Buy, quarterly results from Urban Outfitters ((URBN - Free Report) ) were significantly better than expected after the close on Monday.

Sheraz Mian
Director of Research

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