David Moenning's Daily State of the Markets: 6/16

June 16, 2009 9:40 AM EDT

Just Getting Started?

After the biggest one-day drop since April 20th, the question investors are probably asking themselves this morning is: Was that it or are the Bears just getting started?

As we’ve mentioned recently, corrections in the first phase of “mini� bull markets tend to be short and shallow. And so far at least, this trend has held up as the biggest drops since March 10th have been the -5.4% two-day dive in late March and then the -4.9% pullback that occurred over 5 days in early May. However, what we have not focused on to date is the fact that as a “mini� bull ages, the uptrend eventually gives way to a corrective phase that is a little grizzlier in nature.

For example, if we use history as our guide and assume that the most relevant market was the 1974/75 affair, we find that it took more than seven months before the bears were able to muster a decline of more than -5%. However, that one was definitely worth paying attention to as stocks pulled back about -11% over a period of two and one-half months.

So, with the headwinds starting to blow and nary a correction worth noting over the past three months, it is probably a good idea to at least allow for the possibility – not the probability – that the bears could get something more than a one or two-day wonder going at some point.

Yesterday’s decline was sponsored by a host of negative inputs including big declines in overseas markets, the IMF’s suggestion that the worst is not over in the global economic crisis, geopolitical concerns relating to Iran and North Korea, heightened worries about the European banking system, a rebound in the dollar, another day of erosion in the reflation trade, weaker-than expected results from the Empire Manufacturing Index, and some angst over the President’s proposals for reforms in the areas of healthcare and the financial system.

Although volume wasn’t stellar, technicians also point out if you look really hard at the charts, yesterday’s dive appeared move the Dow and S&P below the lower end of the June trading range, which if true, could lead to some additional downside action. However, it is important to keep in mind that pullbacks have indeed been shallow thus far and with the end of the quarter now just 10 trading days away, there is a decent chance that this pullback may also prove to be shallow.

Turning to this morning, we’ve got a fair amount of economic data to sift through, so let’s get to it. The Producer Price Index (PPI) for May came in better than expected at +0.2%, which was considerably below the expectations for an increase of +0.6%. When you strip out food and energy (which still sounds silly every time we mention it), the Core PPI fell by -0.1%, which was also better than the consensus of +0.1%.

On the housing front, Housing Starts were reported at 532K, which was a 17.2% increase from April and well above the estimates for a reading of 485K while Building Permits came in at 518k versus expectations for 500k. And so far at least, traders appear to like what they see in these numbers. But there is still some concern about the President’s speech tomorrow, so be sure to stay tuned.

Running through the rest of the pre-game indicators, the major overseas markets are mixed by region with Asia down and Europe up. Crude futures are moving up with the latest quote showing oil trading higher $1.64 to $72.26. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.77%, while the yield on the 3-month T-Bill is trading at 0.16%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a better open. The Dow futures are currently ahead by about 30 points; the S&P’s are up about 4 points, while the NASDAQ looks to be about 4 points above fair value at the moment.

Stocks “In Play� This Morning:

Today’s Earnings Before the Bell:

Best Buy (NYSE: BBY) – Reported $0.42 vs. $0.34
Smithfield Foods (NYSE: SFD) – Reported -$0.55 vs. -$0.62

Upgrades/Downgrades/Brokerage Research:

CEMEX (NYSE: CX) – Downgraded at BofA/Merrill
AT&T (NYSE: T) – Downgraded at Barclays
Nike (NYSE: NKE) – Target increased at Citi
Weyerhaeuser (NYSE: WY) – Removed from Buy list at Goldman
Sina Corp (Nasdaq: SINA) – Added to Buy list at Goldman
Capital One (NYSE: COF) – Estimates increased at JP Morgan
Omnicom (NYSE: OMC) – Upgraded at Oppenheimer
Research In Motion (Nasdaq: RIMM) – Target increased at Thomas Weisel
Intl Business Machines (NYSE: IBM) –Target increased at Thomas Weisel

Long positions in stocks mentioned: IBM

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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