David Moenning's Daily State of the Markets: Twice Is A Tradition


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October 2, 2009 9:16 AM EDT

One of my absolute favorite Wall Street-isms goes toward the short-term – no, make that A.D.D-like thought process that traders possess. It goes like this: Once is a trend; twice is a tradition; and three times is a commandment!

So, it looks like we just might have a new “tradition” in the stock market: Start each month with a big down day that scares the bajeebers out of anyone who has purchased stocks in the last two months. As Exhibit A, I offer August 3rd. The S&P plunged -2.2%, while the Dow dove nearly 200 points and the Russell Small Caps got clocked for more than -2.4%.

From there, though, the markets turned around within two days and proceeded to make a mockery of all those folks counseling caution for the market’s worst month of the year. Instead of heading for the hills, traders decided to discount better days ahead in the economy – to the tune of +3.6% for the S&P in September and +5.6% for the NASDAQ. So, if you had followed the prevailing prognosis and sold in order to avoid the big bad month of September, you would have felt more than a little foolish by the time the closing bell rang on Wednesday.

So, in light of the fact that October has started off on an equally bad note, should we expect the bulls to work their magic once again? After all, the S&P dove -2.6% yesterday while the NASDAQ was hit for a loss of -3.1%, and the Russell was trashed by -3.4%. So, repeat after me… “Once it a trend, twice is a tradition…”

Shelving the foolishness for a moment, we should probably point out that yesterdays big dive was sponsored by a pause in the economic recovery theme. After the Chicago PMI came in below expectations on Wednesday, the bulls were hoping that the national version of the report would prove it a fluke. But instead, the ISM (they now call themselves the Institute for Supply Management) Manufacturing Index came in with a reading of 52.6. While this level does indicate that the manufacturing sector continues to expand, the reading was below August’s 52.9 and the consensus expectations for 54.

So, despite the fact that we had not one, but two reports from the housing market that came in better than expected (both Pending Home Sales and Construction Spending were above consensus) and the fact that the miss by the ISM was only the second in the last 9 months, traders focused on the dark side. And in light of the fact that we haven’t had a meaningful pullback in quite some time, the dip buyers likely went into “stand aside” mode for the day.

Speaking of dip buyers, it is a safe bet that the relative performance chase is still on, but since buyers were likely aware of the new tradition to start each month, it looks like they took the day off.

Turning to this morning, we’ve got the Big Kahuna of economic data – the September Employment report. The Labor Department reported that the economy lost 263K jobs last month, which was well below the expectations for 187K. The Unemployment Rate came in up a tenth at 9.8%, which was in-line with the consensus. Not surprisingly, stock futures have moved lower in response.

Running through the rest of the pre-game indicators, the foreign markets followed Wall Street lower across the board. Crude futures are moving down with the latest quote showing oil trading off by $1.17 to $69.65. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.12%, while the yield on the 3-month T-Bill is currently at 0.10%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to another lower open. The Dow futures are currently off by about 85 points; the S&P’s are down about 10 points, while the NASDAQ looks to be about 10 points below fair value at the moment.

Upgrades/Downgrades/Brokerage Research:

Polycom (PLCM) – Target increased at Barclays
China Unicom (CHU) – Upgraded at Credit Suisse
Southwestern Energy (SWN) – Upgraded at Deutsche Bank
XTO Energy (XTO) – Downgraded at Deutsche Bank
Accenture (ACN) – Added toBuy list at Goldman
DreamWorks Animation (DWA) – Added to Buy at Goldman
Telmex (TMX) – Downgraded at JP Morgan
Repsol (REP) – Upgraded at JP Morgan
BB&T Corp (BBT) – Upgraded at Keefe, Bruyette & Woods
US Bancorp (USB) – Upgraded at Keefe, Bruyette & Woods
PNC Bank (PNC) – Downgraded at Keefe, Bruyette & Woods
AK Steel (AKS) – Named Short research idea by Morgan Stanley
U.S. Steel (X) – Named Short research idea by Morgan Stanley
Intel (INTC) – Upgraded at Oppenheimer
Brightpoint (CELL) – Downgraded at Piper Jaffray
Nokia (NOK) – Downgraded at Piper Jaffray
Costco (COST) – Upgraded at RW Baird
Winnebago (WGO) – Downgraded at RW Baird
Apple (AAPL) – Upgraded at UBS
Comcast (CMCSA) – Upgraded at Wells Fargo

Long positions in stocks mentioned: GS, CHU, AAPL

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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