David Moenning's Daily State of the Markets: 5/11
Divergent Behavior
I got a call on Friday from a friend, who was not at all pleased with the day’s market action. Curt is both a friend and a colleague so I took the call and listened intently as he remarked in an annoyed tone, “I’ve got longs that are down and shorts that are up – what kind of up day is this?”
Before you jump to the conclusion that anyone who manages to lose money on both sides of the equation when the Dow is up 160 points may be a bit of an amateur, I should take a moment to point out the Curt has been in the business since the late 1970’s and his, what he calls, “synthetic hedge fund accounts” not only did NOT lose money during the bear market, but are up more than +9% this year. So, in short, this guy is no dummy.
Curt, along with just about everybody else that has been around a while, has been positioning for a short-term pullback in the market. As such, he has purchased some short ETF’s as a way to hedge his long holdings in tech, financials, and the small cap indices. But unfortunately, on Friday while the Dow and S&P were busy breaking to new cycle highs, technology was actually heading lower.
The unofficial explanation for the divergent behavior was that the hedgies were busy rotating out of tech and into the banks. The thinking was that with the banks having been given a clean bill of health or at least a path thereto, it was time to bomb in and buy the banks.
The talk about town was that tech, as an early cycle leader, had run too far too fast and had gotten ahead of itself. Exhibit A was the Cisco (CSCO) conference call in which Mr. Chambers had sounded less than optimistic about the future.
The only problem with this explanation is that when it comes to earnings reports, John Chambers is famous for two things: Beating the estimates and lately - sandbagging the future. So, it is a little curious that the fast money would use this type of an explanation for a reason to sell tech and buy banks.
The point, you ask? Sometimes, the trader types move the market in strange ways. And while there are times when the movement marks the beginning of a trend, there are also times when the action is just noise that should be filtered out. Thus, we will need to keep an eye on the technology/banking relationship in the near term.
The real dilemma in the market right now is the question of when traders will no longer accept economic data that is “less bad” as a positive and instead begin to demand actual improvement. In all honesty, we don’t have an answer as to when this might happen. But, with every 2% blast higher in the market, we would seem to grow ever closer to that day.
At some point, the indices will have fully discounted the recession’s end and we will need to see some signs of an upswing in order to justify further increases in stock prices. But Friday’s romp would seem to indicate that we’re not there yet.
Turning to this morning, we don’t have any economic news before the bell but it does look like stocks want to pull back a bit here in the early going.
Running through the rest of the pre-game indicators, the major overseas markets are mixed. Crude futures are moving down with the latest quote showing oil trading lower by $1.68 to $56.95. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.22%, while the yield on the 3-month T-Bill is trading at 0.17%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a lower open. The Dow futures are currently off by about 130 points; the S&P’s are down about 15 points, while the NASDAQ looks to be about 21 points below fair value at the moment.
Stocks “In Play” This Morning:
Today’s Earnings Before the Bell:
Broadridge Financial Solutions (NYSE: BR) – Reported $0.26 vs. $0.22
Dish Network (Nasdaq: DISH) – Reported $0.70 vs. $0.56
King Pharmaceuticals (NYSE: KG) – Reported $0.26 vs. $0.13
Southern Union (NYSE: SUG) – Reported $0.59 vs. $0.35
Wellcare Health Plans (NYSE: WCG) – Reported $0.29 vs. $0.14
Warner Chilcott (Nasdaq: WCRX) – Reported $0.39 vs. $0.39
Upgrades/Downgrades/Brokerage Research:
Williams Sonoma (NYSE: WSM) – Downgraded at BofA/Merrill, Bernstein
Intl Paper (NYSE: IP) – Upgraded at BofA/Merrill, Goldman
Bemis (NYSE: BMS) – Downgraded at BofA/Merrill
Sealed Air (NYSE: SEE) – Downgraded at BofA/Merrill
Home Depot (NYSE: HD) – Downgraded at Bernstein
Lowes (NYSE: LOW) – Downgraded at Bernstein
Clorox (NYSE: CLX) – Downgraded at Bernstein
Universal Health Svcs (NYSE: UHS) – Upgraded at Citi
Health Management Assoc (NYSE: HMA) – Upgraded at Citi
Lifepoint Hospitals (Nasdaq: LPNT) – Upgraded at Citi
American Eagle (NYSE: AEO) – Upgraded at Citi
Dow Chemical (NYSE: DOW) – Upgraded at Credit Suisse
Manpower (NYSE: MAN) – Upgraded at Deutsche Bank, UBS
Owens Illinois (NYSE: OI) – Added to list at Goldman
Lincoln National (NYSE: LNC) – Added to Buy list at Goldman
MetLife (NYSE: MET) – Added to Buy list at Goldman
Tenneco (NYSE: TEN) – Added to Buy list at Goldman
Devon Energy (NYSE: DVN) – Added to Buy list at Goldman
CB Richard Ellis (NYSE: CBG) – Downgraded at Goldman
L-3 Communications (NYSE: LLL) – Downgraded at Goldman
Dollar Tree Stores (Nasdaq: DLTR) – Removed from Buy list at Goldman
Costco (Nasdaq: COST) – Downgraded at Goldman
Aon Corp (NYSE: AOC) – Downgraded at Goldman
Prudential (NYSE: PRU) – Downgraded at Goldman
Valero (NYSE: VLO) – Downgraded at Goldman
Louisiana Pacific (NYSE: LPX) – Upgraded at Goldman
Automatic Data Processing (NYSE: ADP) – Upgraded at UBS
Robert Half (NYSE: RHI) – Upgraded at UBS
Korn Ferry (NYSE: KFY) – Upgraded at UBS
Micron Technology (NYSE: MU) – Downgraded at UBS
Long positions in stocks mentioned: BR, SUG, AEO, DLTR, COST
Note: All earnings reports compared to Reuter’s consensus estimates
** For More of David Moenning’s Market Analysis, Stock Portfolios, and Trading Ideas, visit: www.TopStockPortfolios.com
The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management and Co-Founder of TopGunsTrading.com and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security or Heritage Capital program. No part of this material is intended as an investment recommendation. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any of HCM’s programs. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that investment objectives outlined will actually come to pass. Investors should consult an Investment Professional before investing in any investment program. Neither Mr. Moenning or Heritage Capital Management nor any of their employees shall have any liability for any loss sustained by anyone who has relied on the information contained herein. Mr. Moenning and employees of HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while this publication is in circulation. The analysis contained is based on both technical and fundamental research. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.
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