David Moenning's Daily State of the Markets: The China Syndrome


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September 1, 2009 9:04 AM EDT

Stocks pulled back on Monday, but the bottom line is it could have been a lot worse. Investors watched the Shanghai index fall -6.7% overnight, as China’s stock market finished the month of August with a gut-wrenching loss -22%. At issue there is the worry that lower bank lending and talk of curbing overcapacity will choke off the Chinese economic recovery.

Most overseas markets followed suit, albeit to a lesser degree since the game right now seems to be: As China goes, so goes the world. So, given the overbought condition here in the U.S. and all the talk about a meaningful correction starting soon, it wasn’t exactly surprising to see the U.S. take a hit at the open yesterday morning.

There was some good news however, as the Chicago Purchasing Managers Index rose to the all-important level of 50 in August, which was up from 43.4 in July. The PMI in the Windy City posted its biggest monthly gain since April and hit its highest level since September 2008. New Orders were also upbeat as the index rose to 52.5 from 48, which was a one-year high while, order backlogs jumped to 45.8 from 32.1.

Although the bulk of yesterday’s decline was attributed to the correction in China, there were a number of additional inputs that were not exactly upbeat. For example, there were several bearish articles in the financial press that seemed to weigh on trader sentiment. The NY Times reported that some of the analysts who had called the bottom in March, are now saying that the market may have peaked for the year and could be headed for a sharp pullback. In addition, an article in the WSJ noted that stocks are unlikely to be able to sustain their gains without a pickup in revenue growth next year, while another highlighted the potential for problems in commercial real estate to reignite the mortgage crisis. Finally, Bloomberg reported that mutual funds, pensions and endowments are dumping US consumer stocks at the fastest pace in at least 14 years.

Then there is the issue of the calendar change. Anyone who’s ever taken a gander at the Stock Trader’s Almanac knows that September is the worst month of the year for the market – well at least for the last 80 years, anyway. Now toss in all the concerns about this market having run up faster than at any time since the 1930’s and it is little wonder that there is some trepidation right now.

But despite what appears to be a pretty decent setup, the bears didn’t exactly go home happy yesterday. The Dow pulled back just 48 points and the S&P 500 couldn’t even stay below its 10-day moving average for long as it appears the dip-buyers were back at it again yesterday afternoon.

So for now at least, the tight trading range continues and the bears can’t seem to get any respect. However, September has arrived, so while it is tempting to just go off and play golf for the rest of the week, it might be a good idea to at least keep an eye on the market via your cellular internet connection between nine’s.

Turning to this morning, there is plenty of economic data to review; but all of it comes at 10:00 am eastern. At that time we’ll get the ISM Manufacturing report for August, July Construction Spending, and Jul Pending Home Sales.

Running through the rest of the pre-game indicators, the major overseas markets are mixed by region as Asia rebounded modestly while the European markets are down about -1%. Crude futures are moving lower with the latest quote showing oil trading down by $0.16 to $70.12. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.40%, while the yield on the 3-month T-Bill is trading at 0.14%. 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 45 points; the S&P’s are down about 4 points, while the NASDAQ also looks to be about 4 points below fair value at the moment.

Upgrades/Downgrades/Brokerage Research:

Verizon (VZ) – Downgraded at AURIGA
Coach (COH) – Upgraded at BofA/Merrill
Alexion Pharmaceuticals (ALXN) – Upgraded at Citi
Lockheed Martin (LMT) – Upgraded at Citi
Raytheon (RTN) – Downgraded at Citi
Companhia Vale do Rio Doce (VALE) – Upgraded at Credit Suisse
Alcatel-Lucent (ALU) – Downgraded at Credit Suisse
Motorola (MOT) – Upgraded at Credit Suisse
Research in Motion (RIMM) – Upgraded at Credit Suisse
Qualcomm (QCOM) – Downgraded at Credit Suisse
Nokia (NOK) – Downgraded at Credit Suisse
American Axle (AXL) – Downgraded at Deutsche Bank
Marvel Entertainment (MVL) – Downgraded at JP Morgan
Aetna (AET) – Downgraded at Leerink Swan
Laboratory Corp (LH) – Downgraded at Leerink Swan
Textron (TXT) – Upgraded at Morgan Stanley
Cigna (CI) – Target increased at UBS
BHP Billiton (BHP) – Upgraded at UBS
Massey Energy (MEE) – Upgraded at UBS
Wal-Mart (WMT) – Estimates increased at William Blair

Long positions in stocks mentioned: RIMM, QCOM


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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