Bears Readying A Comeback?

Good morning. After a solid rally, which took the indices up nicely and into overbought territory, and sentiment having become decidedly upbeat lately, the bears were looking at a pretty decent set up for a comeback. And with the dollar being the tail that wags the dog these days, any hint of a greenback rally has spurred selling in the stock market for the past month or so.

Despite some economic data that wasn't half bad, traders decided to focus on the macro picture yesterday. Mother Merrill kicked things off when they decided that they had seen enough of the tech rally. Their crystal ball sees an inventory correction on the horizon and Merrill proceeded to downgrade eight semiconductor stocks, including Intel. And although the report suggested that the corrective phase is likely to be short, the damage was done as traders scrambled to lock up big profits in tech.

While there were no big headlines on the macro front, traders are obviously back in worry mode. One need look no further than the yield on the T-Bill (30- day T-Bill yields were down to 0.01% yesterday before the bell) to see that safety is suddenly back in vogue. Although it may be counterintuitive on the surface, worries about the global recovery also means a flight to the relative safety of the U.S. dollar. And we all know by now what a rising dollar means to the stock market.

On the economic front, the news of the day was actually pretty decent. Although the Jobless Claims report reminded investors that the jobs market is still in the tank and the Leading Economic Index came in a tenth light, the Philly Fed Index was well above consensus expectations. However, a report from the Mortgage Bankers Association stating that mortgage delinquencies hit a record high and that foreclosures are still on the rise was not particularly well received as it reminded investors that things are not exactly peachy keen in the economy.

So, with the dollar rising, tech getting hit, and technical lines in the sand coming under attack on the charts, the bears made a comeback yesterday. But since the bulls were able to defend the 10-day moving average on the Dow and S&P, the jury is still out on how low the bears can go right now.

Turning to this morning, we don't have any economic data to review before the bell. However, the news wires have been humming – and not in a good way.

First, Dell's (DELL) earnings missed by a fairly wide margin, which is putting more pressure on tech in the overnight markets.

Next, the bears are pointing to the comment from Zhang Ping, chairman of the National Development and Reform Commission in China, who said this morning that the Chinese recovery is not strong enough.

And as if that weren't enough to cause early-rising traders to lean on the sell button, we've got a rumor of a sovereign debt default out of the Ukraine.

The latter two stories are creating a bit of a stir and causing more concerns about the macro picture. As a result the dollar is rising once again and the yield on the T-bill is back to just 0.01% as traders appear to be more concerned about the return OF their month than the return ON their money.

Running through the rest of the pre-game indicators, the foreign markets are lower across the board. Crude futures are lower with the latest quote showing oil trading down by $0.71 to $76.75. On the interest rate front, we've got the yield on the 10-yr trading at 3.35%, while the yield on the 3-month T-Bill is currently at 0.01%. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to another lower open. The Dow futures are currently off by about 45 points; the S&P's are down by about 6 points, while the NASDAQ looks to be about 12 points below fair value at the moment.

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