David Moenning's Daily State of the Markets: 7/27

July 27, 2009 10:15 AM EDT

This Just In…

They say that knowledge is power. However, in the investment business, knowledge is often the essential ingredient needed to take a position and stick with it. For example, with stocks up an impressive +13% on the NASDAQ over the prior 12 trading days before Friday, it would normally be difficult to even think about the idea of additional upside in the near term. No, normally we’d be shouting about an overbought condition and looking for a pullback. However, after doing some digging, this may not be the proper approach.

With the caveats that (a) our crystal ball is still in the shop and (b) the market can and will do anything it pleases at any time, I’d like to offer up some research that my colleague Curt Bergquist came up with on Friday afternoon. In short, it would be logical to assume that a string of consecutive up days in the market would lead to a correction. However, in looking at the strings of consecutive up days on the NASDAQ since 1971, Curt found that this simply is not the case.

Since the NASDAQ opened its doors, or shall I say, turned on its computers for trading in 1971, there have 17 long strings of consecutive up days lasting 11 trading days or more (the current streak that ended on Friday was 12 days). Our question was what did the ensuing pullbacks after such strings of consecutive up days look like? The answer was: Not much. Surprisingly, after sustained moves to the upside, the next correction was very short and very shallow; in fact the declines were less than -1% in 14 of the 17 cases with the biggest drop being -3.47% at the end of the October 1980 run.

From there, the market usually proceeded to power higher – sometimes much higher – before ultimately giving way to a meaningful correction. In fact, on average, the gain after the long streak ended was another 7.3%. Thus, based on history, it may not be wise to be looking for a pullback of any magnitude right now.

So, it would appear that we should view long stretches of consecutive up days as a bullish condition. In this particular case, since the economic data is now showing the recession to be ending, we’re betting that mutual fund managers are putting money to work at the present time. And since we know that the pullbacks have tended to be brief and that the market usually goes higher after a little pullback, we should probably use any dip in the near term as a buying opportunity.

What was also interesting about our research exercise was the ultimate correction was a doozie. In fact, the vast majority of the time (12 out of 17 cases) the correction actually wiped out the entire move to the upside. Thus, we’ll opine that when investors are anxious enough to produce a long stretch of consecutive up days; they may wind up overdoing it to the upside.

In any event, with the NASDAQ’s string of consecutive up days having now ended at 12 after Friday’s decline of -0.39%, we will be looking to see if history holds and if the rally can resume in the near term.

Turning to this morning, we don’t have any economic news to review before the opening bell. However, we will get a report in New Home Sales at 10:00 am eastern. And it looking at the earnings parade, it appears that the earnings and guidance disappointment from Honeywell (HON) is driving the action a bit lower in the early going.

Running through the rest of the pre-game indicators, the major overseas markets are higher across the board by varying degrees. Crude futures are moving up with the latest quote showing oil trading higher by $0.13 to $68.18. On the interest rate front, we’ve got the yield on the 10-yr trading higher at 3.70%, while the yield on the 3-month T-Bill is trading at 0.18%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a modestly lower open. The Dow futures are currently off by about 12 points; the S&P’s are down by about 1 point, while the NASDAQ looks to be about 3 points below fair value at the moment.

Today’s Earnings Before the Bell:

Alberto-Culver (NYSE: ACV) – Reported $0.28 vs. $0.29
Aetna (NYSE: AET) – Reported $0.68 vs. $0.78
Alpha Natural Resources (NYSE: ANR) – Reported $0.24 vs. $0.39
Foundation Coal (NYSE: FCL) – Reported $0.67 vs. $0.72
Corning (NYSE: GLW) – Reported $0.39 vs. $0.32
Honeywell (NYSE: HON) – Reported $0.60 vs. $0.60
Invesco (NYSE: IVZ) – Reported $0.18 vs. $0.16
Lorillard (NYSE: LO) – Reported $1.71 vs. $1.43
RadioShack (NYSE: RSH) – Reported $0.39 vs. $0.29
Tellabs (Nasdaq: TLAB) – Reported $0.07 vs. $0.06
Verizon (NYSE: VZ) – Reported $0.63 vs. $0.63

Upgrades/Downgrades/Brokerage Research:

Boeing (NYSE: BA) – Downgraded at Barclays
Con-Way (NYSE: CNW) – Upgraded at Credit Suisse
UnitedHealth (NYSE: UNH) – Upgraded at Credit Suisse
Autodesk (Nasdaq: ADSK) – Downgraded at Deutsche Bank
BE Aerospace (Nasdaq: BEAV) – Upgraded at FBR Capital
T. Rowe Price (Nasdaq: TROW) – Upgraded at FBR Capital
Energizer (NYSE: ENR) – Added to Buy list at Goldman
Lowes (NYSE: LOW) – Removed from Buy list at Goldman
Cabot Oil & Gas (NYSE: COG) – Downgraded at Oppenheimer
Gardner Denver (NYSE: GDI) – Upgraded at RBC Capital, RW Baird
Knight Transportation (NYSE: KNX) – Upgraded at RW Baird
Exelon (NYSE: EXC) – Downgraded at Wells Fargo
Global Payment (NYSE: GPN) – 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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• Credit Suisse
• Deutsche Bank
• New Home Sales
• Robert W Baird
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