David Moenning's Daily State of the Markets: A Prelude of Red Numbers to Come?


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August 17, 2009 9:20 AM EDT

With the bulls pulling off a last-minute save on Friday afternoon, those stock traders on the long side were able to head home and enjoy a summer weekend without the fear that a triple-digit decline might be a prelude of bad things to come. However, with an hour to go in the trading day, things didn’t look quite so bright.

With stocks having blasted higher over the past month, a break in the action is certainly to be expected, if not warranted. Thus, it was little surprise that the market succumbed to some selling when a steady stream of bad news hit the tape on Friday. First, there was the ongoing pullback in China’s Shanghai stock index, which after Friday’s action, saw the biggest weekly decline since February. Then there was the follow-up to Thursday’s disappointing retail sales numbers as the University of Michigan’s Consumer Sentiment Index missed by a mile. Next were the Bloomberg articles that weren’t exactly upbeat toward the banks. And finally the earnings/guidance from JC Penney (JCP) was not particularly well received.

So… with an overbought market that appeared to be running out of steam and a relatively downbeat news flow, the triple-digit decline in the Dow seemed about right. The problem for the bulls throughout much of the day though was the worry that a breakdown below the 990 level on the S&P might bring in a big batch of selling on a Friday afternoon in August.

Before we skip ahead to a story that actually ends relatively well, we should probably give the UofM number more than just a passing glance. In short, this was Friday’s biggest problem as the numbers were pretty darned disappointing and do not paint a very rosy picture regarding the state of the consumer. To review, the University of Michigan’s Index of Consumer Sentiment fell to 63.2 in August, which was a far cry from the expectations for a reading of 69 and the 66 level that was seen in July. This is the lowest reading since stocks bottomed back in March and is not heading in the right direction as the expectations component fell for the third month in a row to 62.1 from 63.2.

But with all three major indices threatening to break down on the charts and things looking less than rosy with an hour to go, somebody somewhere must have run a buy program because stocks shot higher in the half-hour for no real reason; cutting the losses in half. So, if one had just come in off the golf course to glance at the final numbers, they might have shrugged off the drop of 77 points as nothing much to fret about. However, without that big save, things might have turned out very differently.

So, the question of the day is if we should take the last-minute rally as a sign of strength or the overall weakness as a prelude of more red numbers to come? While our crystal ball is still in the shop, we will offer two thoughts on the topic. First, a pullback about now would be completely normal. But second, that seems to be what everyone in the game is expecting right about now. So, stay tuned because we have another thinly traded week in August ahead of us.

Turning to this morning, disappointing economic data in Japan and a selloff in China has the bulls on the run this morning and the open is looking ugly. On the economic front, the Empire Manufacturing index came in at 12.08, which was much higher than expectations for 3.0 and July’s reading of -0.55. Of note, the employment component came in at -7.45, which again, was much better than July’s reading of -20.5.

Running through the rest of the pre-game indicators, the major overseas markets are down hard across the board. Crude futures are moving lower with the latest quote showing oil trading off by $1.56 to $65.95. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.52%, 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 rough open. The Dow futures are currently off about 140 points; the S&P’s are down about 16 points, while the NASDAQ looks to be about 23 points below fair value at the moment.

Today’s Earnings Before the Bell:

Lowe’s (LOW) – Reported $0.51 vs. $0.54

Upgrades/Downgrades/Brokerage Research:

Autonation (AN) – Upgraded at BofA/Merrill


BorgWarner (BWA) – Upgraded at BofA/Merrill
Genuine Parts (GPC) – Upgraded at BofA/Merrill
TRW Automotive (TRW) – Upgraded at BofA/Merrill
CEMEX (CX) – Upgraded at Deutsche Bank
IMS Health (RX) – Upgraded at Goldman
Gartner (IT) – Upgraded at JP Morgan
Avalon Bay (AVB) – Downgraded at Oppenheimer
HCP (HCP) – Downgraded at Oppenheimer
Boston Properties (BXP) – Downgraded at Oppenheimer
Wal-Mart (WMT) – Upgraded at Rochdale
Public Storage (PSA) – Downgraded at Wells Fargo

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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