David Moenning's Daily State of the Markets: 7/7

Looking For a Bottom

The headlines read that the market rebounded a bit during Thursday’s holiday-shortened session. However, while the Dow was indeed up +0.65%, the S&P managed to only gain +0.11% and both the NASDAQ and Russell 2000 were actually down on the day (-0.27% and -0.98% respectively). Thus, we will have to call it a ‘mixed bag’ session.

While it didn't make any of the headlines, one of the biggest factors in the market Thursday was the fact that it was the last session before an extended holiday weekend. This created a light volume session as many traders may have headed to the beach early. Thus, it is hard to get overly excited about the so-called up day that occurred in the midst of the current thrashing being applied to stocks.

Speaking of thrashings, another major factor in the market at the moment is the breath-taking plunge seen in some of the material stocks; particularly the coal and steel names. While it is hard to argue with a correction after a rather spectacular run to the upside, the severity of the pullback is definitely getting investors' attention.

There were two reports tied to the nearly 20% plunge in the coal names. First, Bloomberg reported that China had increased on-grid electricity prices effective 01-Jul. The country's National Development and Reform Commission stated that prices of electricity paid to coal-fired generators in Guangdong province will rise 2.6 cents per kilowatt-hour, while Beijing prices will increase by 1.03 cents and Shanghai by 2.14 cents. The price increases are part of the Commission's efforts to help boost the profitability of electricity producers and curb energy consumption growth in the face of rising coal prices. Next, Stifel Nicolaus commented that total electricity generation in the regions where coal competes as a power-generating fuel in the U.S., excluding the West Coast and New England, was down 3.8% y/y for the week ended 20-Jun.

So there you have it. After runs of more than 100% since the middle of March, the reports showing that demand might be declining in the future was enough to give the hedgies an opportunity. And since everybody knows that the moves in these names have been overdone, there was no one standing on the other side of the trade. However, on Thursday some of the coal stocks started to get some support from the Street, which may be an indication that a bottom may be at hand.

Speaking of bottoms, with everyone and their grandmother talking about a bear market, we might be ready to start looking for a bottom. What is needed at this stage is for something good to happen, which would cause investors to recognize that (a) the sky isn’t falling and (b) prices may already reflect the bad news that is out there.

Turning to this morning, we don’t have any economic data to review before the bell and the data flow is relatively light this week. However, keep an eye on Thursday’s weekly jobless claims. While the ECB’s decision to increase rates overshadowed the news last Thursday, this has become an important short-term indicator for the direction of the economy.

Running through the rest of the pre-game indicators, the overseas markets are higher across the board. Crude futures are lower by $2.14 with the latest quote at $143.15. Interest rates are moving unchanged this morning as the 10-yr is trading with a yield of 3.97% right now. And finally, with about an hour before the bell, stock futures in the U.S. are looking to open a smidge higher. The Dow futures are currently ahead by about 7 points; the S&Ps are about a point above breakeven, while the NASDAQ looks to be about 5 points above fair value at the moment.

Stocks "In Play" This Morning:

News, Upgrades/Downgrades/Brokerage Research:

STMicroelectronics (NYSE: STM) – Upgraded at ABN Amro
CF Industries (NYSE: CF) – Upgraded at Credit Suisse
Rite Aid (NYSE: RAD) – Downgraded at Credit Suisse
Suncor Energy (NYSE: SU) – Upgraded at JP Morgan
CBS (NYSE: CBS) – Downgraded at Lehman
News Corp (NYSE: NWS.A) – Downgraded at Lehman
Disney (NYSE: DIS) – Downgraded at Lehman
Wal-Mart (NYSE: WMT) – Estimates increased at Lehman
RadioShack (NYSE: RSH) – Estimates increased at Lehman
UBS (NYSE: UBS) – Moody’s downgrades debt rating, – Estimates increased at Bank of Amer
Convergys (NYSE: CVG) – Upgraded at Oppenheimer
Juniper Networks (Nasdaq: JNPR) – Upgraded at Piper
Broadcom (Nasdaq: BRCM) – Upgraded at Piper
BT Group (NYSE: BT) – Upgraded at UBS
Merck (NYSE: MRK) – Downgraded at UBS

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

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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