David Moenning's Daily State of the Markets: 06/07

June 7, 2007 9:37 AM EDT

Welcome to the Pullback

Good morning. OK, let's just admit it; pullbacks are never any fun. But unfortunately, they are an important part of the game. Without the occasional scary day, week, or month, stocks would simply run to the moon and then crash and burn whenever a bear came to town. However, by implementing the two-(or three)-steps-forward-and-one-step-back approach, the bulls have found that they can keep the game going in their direction much longer.

And let's be honest here, this time around, you knew it was coming; I knew it was coming, and, in fact, even the most ardent bulls knew that a pullback was coming. You see, whenever stocks enjoy the type of run we've seen lately, it's really only a matter of time before something comes out of the woodwork to create some doubt, some fear, and yes, some selling.

This time around though, the reasons for the pullback are actually a little light. I mean, seriously, is the worry over inflation really new? Haven't we spent much of the last 3 years fretting about the potential for inflation to pick up? Is the fact that interest rates are at the high end of the range really a reason to run out and sell? And would Mr. Bernanke and Company REALLY consider raising rates?

But, in all honesty, none of these questions really matter because stocks were extended and the sentiment became a little too complacent. And when this happens, you can bet dollars to donuts that the bears will try and get something going before long. And don't look now, but it does appear that the bears just might have something going here.

So, how low can we go from here? After two days of selling, the Dow is now 210 points, or -1.5%, from its record high. And given that a run-of-the-mill correction on a short-term basis sees drops something like 3% to 5%, this means we might see the Dow revisit the 13,000 area if the bears have their way. And for those technicians among us, the Fibonacci retracement levels are at 13,279 (25%) and 13,060 (38.2%).

But before we get too carried away with downside projections, let's remember that the current rally has been very impressive so far. So, it might be a good idea to continue to give the bulls the benefit of the doubt for a while.

Turning to this morning, the bears may try and make their presence felt again today. The big news is that interest rates are spiking higher once again. In addition, there is talk of missiles being fired by North Korea. So while it is early, there is a general feeling that this pullback may be more than a one-day wonder.

Running through the rest of the pre-game indicators, the European markets are lower across the board while Asian bourses were little changed. Gold futures are moving down by $0.80 to $673.80. In the oil pits, crude futures are moving up a little with the latest quote at $65.19. Interest rates are moving up again this morning with the yield on the 10-year currently trading at 5.04%, which is a level not seen in almost a year. And finally, with about an hour before the bell, stock futures in the U.S. are looking a little weak once again. The Dow futures are currently off by about 22 points; the S&P's are 4.50 underwater, while the NASDAQ looks to be about 6 points below fair value at the moment.

Stocks "In Play" This Morning:

News, Upgrades/Downgrades/Brokerage Research:*
McCormick (NYSE: MKC) - Upgraded at Bear Stearns
Federal Natl Mort (NYSE: FNM) - Upgraded at Friedman Billings Ramsey
Hanover Compressor (NYSE: HC) - Upgraded at JP Morgan
Volvo (NASDAQ: VOLV) - Downgraded at JP Morgan
Procter & Gamble (NYSE: PG) - Downgraded at Lehman Brothers
General Dynamics (NYSE: GD) - Upgraded at Lehman Brothers
Temple Inland (NYSE: TIN) - Downgraded at Morgan Stanley
Medco Health Solutions (NYSE: MHS) - Upgraded at Raymond James, UBS
Apple (NASDAQ: AAPL) - Target increased at UBS

Mr. Moenning holds Long positions in stocks mentioned: CG, MER

Note: All earnings reports compared to Reuter's consensus estimates

** For More of David Moenning's Market Analysis, Stock Portfolios, and Trading Ideas, visit:

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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