David Moenning's Daily State of the Markets: 5/14

Knowing What to Watch

The positive thing about yesterday’s shellacking was that it cemented the idea that it is indeed the economic data that now holds the key to the future of the stock market. And it is also good news that the market’s reception to future data should actually make sense for a change. For example, positive data showing a potential upturn in the economy will be greeted with buy orders while any reports suggesting that the economy might be languishing will likely lead traders to hit the sell button early and often.

For those that may have been dismayed by yesterday’s selling in response to the weaker-than expected retail sales numbers, you should take heart in the knowledge that this is the way the game works during the bottoming phase of the economy. While it would be great if the long decline in the data was followed by several months of unchanged readings and then a series of positive numbers, unfortunately it just doesn’t work that way. Instead, we see a period of both good and bad results before the upturn begins and it isn’t until you take a step back and look at the bigger picture that the bottoming process is revealed.

However, there is really no way to sugar coat it; the retail sales numbers weren’t great at -0.4% versus the expectations for an increase of +0.1%. In addition, the drop marked the second straight monthly decline after two consecutive increases in January and February. However, it is worthy of note that April results were hardly a disaster at -0.4% and were caused primarily by a drop in gasoline.

But the retail sales numbers weren’t the only thing working against the bulls yesterday. In addition to an overbought market that up until just recently had refused to yield even the smallest pullback, traders were forced to deal with the continued supply of new shares coming into the market as May is already a record for secondary offerings, a report showing a slowdown in China’s industrial production, a record number of foreclosures in April, the administration’s ongoing efforts to control compensation in the financial services sector, and some sell-side firms suggesting clients move to a more defensive strategy after the big rally.

On top of all of those cheerful inputs, the techies were jumping up and down yesterday talking about the importance of the Dow and the S&P 500 finally closing below their 10-day moving averages while the NASDAQ snapped its 25-day ma. While this type of assessment is always left to interpretation, some chartists are suggesting that the major indices are now in never-never land since the next support zone is below current levels.

So, with stocks overbought and due for a pause, it would appear that we’ve finally got a bit of a correction started. From here it will be very interesting to see how much fear and negativity returns. With everyone jumping on the bull bandwagon over the past couple of weeks, it would actually be a positive for some doubt to creep back into the market at this stage.

Turning to this morning, the weekly report on initial jobless claims came in a bit higher than expected at 637,000 vs. the consensus for 610,000. In addition, April’s PPI was a bit hotter at +0.3% vs. expectations for +0.1%.

Running through the rest of the pre-game indicators, the major overseas markets are lower by varying degrees. Crude futures are moving down with the latest quote showing oil trading lower by $0.95 to $57.07. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.09%, while the yield on the 3-month T-Bill is trading at 0.15%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a slightly lower open. The Dow futures are currently off by about 30 points; the S&P’s are down about 3 points, while the NASDAQ looks to be about 5 points below fair value at the moment.

Stocks “In Play” This Morning:

Today’s Earnings Before the Bell:

Kohl’s (NYSE: KSS) – Reported $0.45 vs. $0.44
Urban Outfitters (Nasdaq: URBN) – Reported $0.18 vs. $0.17
Wal-Mart (NYSE: WMT) – Reported $0.77 vs. $0.77

Upgrades/Downgrades/Brokerage Research:

Novellus (Nasdaq: NVLS) – Upgraded at BofA/Merrill
Mylan (NYSE: MYL) – Downgraded at Bernstein
CIGNA (NYSE: CI) – Upgraded at Citi
Louisiana Pacific (NYSE: LPX) – Downgraded at Credit Suisse
Ford (NYSE: F) – Estimate and target increased at Goldman
Liz Claiborne (NYSE: LIZ) – Removed from Conviction Buy list at Goldman
Principal Financial Group (NYSE: PFG) – Upgraded at Goldman
CME Group (NYSE: CME) – Upgraded at JP Morgan
Alaska Air (NYSE: ALK) – Downgraded at Morgan Stanley
Continental Airlines (NYSE: CAL) – Downgraded at Morgan Stanley
Jet Blue (Nasdaq: JBLU) – Downgraded at Morgan Stanley
UAL Corp (Nasdaq: UAUA) – Downgraded at Morgan Stanley
Helmerich & Payne (NYSE: HP) – Downgraded at UBS
Patterson UTI (Nasdaq: PTEN) – Downgraded at UBS

Long positions in stocks mentioned: none

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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