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David Moenning's Daily State of the Markets: 5/20

May 20, 2008 10:12 AM EDT

Blame It On Tech (Or Inflation)

Here's a link to listen to an Audio Version of the report

For much of the morning yesterday, it appeared that the bulls were back and ready to make some noise. They had yet another economic report showing that the economy is not in the throes of a death spiral and with the Dow trading to its highest point of the year, things were looking up. But unfortunately, the rally’s engine appeared to stall out in the afternoon as the market bumped its head on the 200 day moving average, which left the new-high partygoers a bit disappointed.

The morning rally was built around the release of the Index for Leading Economic Indicators, which as we've mentioned a time or two, is really a better indication of what the economy is doing right now. The LEI came in with a surprising gain of +0.1%, which better than expectations and the second gain in a row after a string of five straight declines.

Armed with a handful of economic reports that were not as bad as had been feared, the media began to talk about this being a turning point for the economy. So, despite another bump up in the price of crude, since the shorts were covering and the nervous Nelly’s appeared to be wading back into the water, the Dow enjoyed triple digit gains around lunchtime.

However, the fun abruptly ended at 2:00 pm eastern when SanDisk (SNDK) made some comments about softening sales at the JP Morgan (JPM) technology conference. The memory chip maker was cautious about the coming quarter, which cost the stock about 7.5% in a matter of minutes.

So, as is often the case when the market bumps into an important technical level and things start to look a little too good, traders took the comments from SanDisk as an excuse to take some profits and run a sell program or two. Let’s not forget that technology has been emerging as a leader lately with the NASDAQ in a clear cut uptrend. So, while the red ink on the NASDAQ was a bit disappointing, it didn’t do much to impact the overall trend.

Turning to this morning, the dollar is dropping again, Oppenheimer’s Meredith Whitney says that the credit crisis will continue into 2009, and Boone Pickens is out with comments about $150 oil this year. Not surprisingly, this combination applied some pressure on the futures ahead of the PPI report.

Speaking of inflation, the government just reported that the Producer Price Index for April rose by +0.2%, which was one-half the expectation. However, since the Fed has been focusing on the Core Rate, which, of course, excludes food and energy, it is important to note that, the Core came in with an increase that was double expectations at +0.4%. On a year-over-year basis, the Core Rate has increased 3.0% which is a new cycle high, while the headline CPI has increased by 6.5%. So, with the annual Core now exceeding the Fed’s comfort zone, it is little surprise that stocks have sold off on the report.

Running through the rest of the pre-game indicators; the foreign markets are all lower. Crude futures are moving up again with the latest quote showing oil trading higher by $0.72 to $127.77. Interest rates are moving down a bit as the yield on the 10-yr is currently trading at 3.82%. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to a down open. The Dow futures are currently down by about 60 points; the S&P’s are off by about 6 points, while the NASDAQ looks to be about 4 points below fair value at the moment.

Stocks "In Play" This Morning:

Today’s Earnings Before the Bell:
AutoZone (NYSE: AZO) – Reported $2.49 vs. $2.44
Home Depot (NYSE: HD) – Reported $0.41 vs. $0.37
Medtronic (NYSE: MDT) – Reported $0.78 vs. $0.72
Staples (Nasdaq: SPLS) – Reported $0.30 vs. $0.30

News, Upgrades/Downgrades/Brokerage Research:
Reliant Energy (NYSE: RRI) – Upgraded at Credit Suisse
NRG Energy (NYSE: NRG) – Downgraded at Credit Suisse
Exelon (NYSE: EXC) – Upgraded at Credit Suisse, Deutsche Bank
Covance (NYSE: CVD) – Mentioned positively at Goldman Sachs
Celanese Corp (NYSE: CE) – Mentioned positively at Goldman Sachs
Netflix (Nasdaq: NFLX) – Upgraded at Lehman
Goldman Sachs (NYSE: GS) – Estimates reduced at Lehman
Morgan Stanley (NYSE: MS) – Estimates reduced at Lehman
Progressive Corp (NYSE: PGR) – Upgraded at Wachovia

Disclosure: Mr. Moenning and/or related firms hold long positions in: 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.TopGunsTrading.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.

David D. Moenning
Heritage Capital Management
Main: 630-250-4700
Direct: 303-670-9761
email: [email protected]


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