David Moenning's Daily State of the Markets: Mixed Emotions


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October 1, 2009 9:33 AM EDT

The last day of the third quarter turned out to be one of mixed emotions. While the bulls could be happy about closing out the best quarter in more than a decade, some worries cropped up that managed to keep the celebration in check.

Stocks initially got a nice lift from the government’s final attempt at putting a number on the country’s Gross Domestic Product (GDP) for the second quarter, which by now seems like a lifetime ago to most investors. Instead of the economy falling at an annualized rate of -1.2%, the government reported that GDP contracted at a pace of just -0.7% during the quarter.

But the fun didn’t last long as traders were treated to a surprise from the Chicago Purchasing Managers Index. The index, which is designed to indicate economic activity in the region, was expected to come in with an increase of 2.5 points to reading of 52.5. This is important line in the sand for the data series because anything above 50 indicates economic expansion, while readings below 50 indicate contracting economic activity. So, traders were not at all pleased to see the Chicago PMI come in with a reading of 46.1 in September.

Despite the fact that the PMI report mentioned that such setbacks are not at all unusual when recessions end, the number killed the mood and stocks quickly dove 150 points in about 15 minutes. While there may have been some program trading involved, with much of the recent advance being attributed to things looking up in the economy, it will suffice to say that a setback in economic activity is not what the bulls were looking for.

Another worry that has cropped up recently is the idea that the Fed may pull the punchbowl from the party too soon. As you may recall, Fed Governor Kevin Warsh wrote an Op-Ed piece for the Wall Street Journal on Friday in which he talked about the Fed possibly acting “aggressively” to remove the programs put in place to stave off a collapse of the banking system.

So, when it was reported that former Fed Chairman Alan Greenspan had nice things to say about the economy and then FOMC Vice-Chairman Donald Kohn said that the Fed’s withdrawal is likely still a ways off, the mood of the market improved markedly. And before you figure out where to go for lunch, the Dow had pulled a U-turn and was up on the day.

But as is often the case during these manic depressive types of sessions, the bulls couldn’t keep it going and stocks pulled back a bit into the close. So, once again, although there was some movement in both directions, there were no trendlines, important moving averages, or support zones broken. Thus, all remains right with the world – at least from the bulls’ perspective.

Turning to this morning, don’t look now but it’s October and there is a fair amount of trepidation as we enter the month famous for big declines. But to be fair, when you take out the various market crashes from the historical data, October isn’t really a bad month.

On the economic front, Personal Incomes for August rose by +0.2%, which was above the expectations for an increase of +0.1%. Personal Spending increased by +1.3%, which was also above the consensus of1.1%. However, the weekly jobless numbers were not especially encouraging as initial claims rose 17K to 551K, which was above expectations for 535K. Ongoing claims were a bit better at 6.09M vs. 6.17M.

Running through the rest of the pre-game indicators, the foreign markets are lower across the board. Crude futures are moving down with the latest quote showing oil trading off by $0.51 to $70.10. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.28%, while the yield on the 3-month T-Bill is currently at 0.09%. 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 30 points; the S&P’s are down about 5 points, while the NASDAQ looks to be about 9 points below fair value at the moment.

Upgrades/Downgrades/Brokerage Research:

Morgan Stanley (MS) – Estimates reduced at Barclays
Allstate (ALL) – Estimates increased at Barclays
Chubb (CB) – Estimates increased at Barclays
Hanover Insurance (THG) – Estimates increased at Barclays
PartnerRe (PRE) – Estimates increased at Barclays
Travelers (TRV) – Estimates increased at Barclays
Baker Hughes (BHI) – Upgraded at Bernstein
Helmerich & Payne (HP) – Initiated outperform at Bernstein
Pride Intl (PDE) – Initiated outperform at Bernstein
Smith Intl (SII) – Initiated outperform at Bernstein
Kelly Services (KELYA) – Upgraded at Citi
Martin Marietta Materials (MLM) – Upgraded at Citi
Manpower (MAN) – Downgraded at Citi
Ultra Petroleum (UPL) – Upgraded at Credit Suisse
KB Home (KBH) – Downgraded at Credit Suisse
Alcoa (AA) – Upgraded at Deutsche Bank
Activision Blizzard (ATVI) – Removed fromBuy list at Goldman
Microsoft (MSFT) – Removed fromBuy list at Goldman
PMC-Sierra (PMCS) – Downgraded at Goldman, JP Morgan
Southern Company (SO) – Upgraded at Jefferies
Entergy (ETR) – Downgraded at Jefferies
BMC Software (BMC) – Downgraded at JP Morgan
NVIDIA (NVDA) – Downgraded at JP Morgan
Leap Wireless (LEAP) – Downgraded at JP Morgan
MetroPCS Communications (PCS) – Downgraded at JP Morgan
Saks (SKS) – Downgraded at JP Morgan
Walt Disney (DIS) – Target increased at Morgan Stanley
Agilent (A) – Downgraded at Thomas Weisel
Bronco Drilling (BRNC) – Upgraded at UBS
Pioneer Drilling (PDC) – Upgraded at UBS
Patterson-UTI (PTEN) – Upgraded at UBS

Long positions in stocks mentioned: GS, THG, MSFT

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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