David Moenning's Daily State of the Markets: 7/25

July 25, 2008 9:36 AM EDT

Bump and Run

Here's a link to listen to an Audio Version of the report: 

I saw an AP report yesterday afternoon where the first line read, “Wall Street abruptly ended an earnings-driven rally and closed sharply lower on Thursday…� My problem here is that anyone believing that the recent bounce higher in stocks was “earnings driven� is delusional. As we’ve mentioned a time or two over the past week, the blast seen in stocks since the 15th of July had little to do with earnings and a lot to do with a legislative induced short squeeze.

Unfortunately however, the rest of the line wasn’t much better as the writer continued with, “…a steeper-than expected decline in existing home sales and worries about the financial sector chilled the market’s recent enthusiasm.� And while I will award the author style points for the bit about the market’s enthusiasm suddenly becoming chilled, I’ve got problems with this line as well.

As long-time readers know, I’m anything but a pure market technician. I do spend an awful lot of time looking at charts, but I prefer to toss a little reasoning into my chart analysis when attempting to make sense of the action. This brings us to the reason for the yesterday’s sudden tank job of 283 points on the Dow.

Sure, the news on existing home sales was crummy. Sales fell by 2.6%, inventories rose and now represent 11.1 months of supply, and prices were down something like 7.7% from last year. But come on, was anyone really expecting something good to come out of this report?

No, there were two primary reasons for yesterday’s plunge. First, as the saying goes, “When the U.S. sneezes, the world catches cold.� And since the U.S. Financial System is in the ICU on life support, it is little wonder that our ills are starting to spread throughout the world. For example, the Reserve Bank of New Zealand cut interest rates for the first time in five years yesterday citing economic weakness. Next, we got a barrage of weaker-than-expected economic reports out of Europe as German business confidence fell for a fourth straight month, UK retail sales saw their worst drop in seven years, and French business sentiment fell to the lowest level in more than three years.

But the biggest reason for yesterday’s reversal of fortunes was purely technical. You see, both the Dow and S&P 500 bumped their heads on their .382 retracement levels – numbers made famous by the 13th century Italian mathematician Leonardo Fibonacci. Thus, the market promptly ran in the opposite direction. As the theory goes, stocks will often retrace a portion of the previous cycle in what is called a countertrend move – or in this case, a dead-cat bounce.

So, as the Dow and S&P bumped into this textbook application of nature’s golden series of numbers, there must have been at least a couple of market technicians out there who witnessed the event and decided to hit the sell button. And with the financials having bounced 30% to 100% in just six days, the bears had some room to work with.

Turning to this morning, the government reported that orders for Durable Goods in June were actually better than expected at +0.8% versus the consensus estimate for a drop of -0.3%. When you strip out transportation, orders increased by 2.0%, which again, was much higher than expectations for a drop of -0.2%. In addition, we will the University of Michigan’s Consumer Confidence Index as well as a report on New Home Sales at 10:00 am Eastern.

Running through the rest of the pre-game indicators; the major foreign markets followed the US lower and are down across the board. Crude futures are moving up with the latest quote showing oil trading higher by $0.30 to $125.79. Interest rates are higher this morning with the yield on the 10-yr currently trading at 4.04%. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to a better open. The Dow futures are currently ahead by about 54 points; the S&P’s are up about 6 points, while the NASDAQ looks to be about 9 points above fair value at the moment.

Stocks “In Play� This Morning:

Yesterday's Earnings After the Bell:

Arch Capital Group (Nasdaq: ACGL) – Reported $2.82 vs. $2.62
BMC Software (NYSE: BMC) – Reported $0.43 vs. $0.42
Burlington Northern (NYSE: BNI) – Reported $1.34 vs. $1.30
Bucyrus (Nasdaq: BUCY) – Reported $0.83 vs. $0.67
Chubb (NYSE: CB) – Reported $1.40 vs. $1.47
Crown Castle (NYSE: CCI) – Reported $0.19 vs. -$0.06
Cabot Oil & Gas (NYSE: COG) – Reported $0.71 vs. $0.74
Columbia Sportswear (Nasdaq: COLM) – Reported -$0.05 vs. $0.04
Curtiss Wright (NYSE: CW) – Reported $0.60 vs. $0.59
Eastman Chemical (NYSE: EMN) – Reported $1.53 vs. $1.53
Federated Investors (NYSE: FII) – Reported $0.58 vs. $0.60
Flextronics (Nasdaq: FLEX) – Reported $0.27 vs. $0.28
FMC Technologies (NYSE: FTI) – Reported $0.80 vs. $0.73
Juniper Networks Nasdaq: (JNPR) – Reported $0.28 vs. $0.27
Lattice Semiconductor (Nasdaq: LSCC) – Reported $0.01 vs. $0.02
Microchip (Nasdaq: MCHP) – Reported $0.40 vs. $0.40
Micrel (Nasdaq: MCRL) – Reported $0.14 vs. $0.13
Nuvasive (Nasdaq: NUVA) – Reported -$0.01 vs. -$0.05
Perkin Elmer (NYSE: PKI) – Reported $0.36 vs. $0.34
Roper Industries (NYSE: ROP) – Reported $0.80 vs. $0.78
Stericycle (Nasdaq: SRCL) – Reported $0.44 vs. $0.42
Taubman Centers (NYSE: TCO) – Reported $0.66 vs. $0.71
Travelzoo Nasdaq: (TZOO) – Reported -$0.08 vs. -$0.02
Varian Semiconductor (Nasdaq: VSEA) – Reported $0.25 vs. $0.24
Western Digital (NYSE: WDC) – Reported $0.94 vs. $0.82
Wynn Resorts Nasdaq: (WYNN) – Reported $1.11 vs. $0.93
YRC Worldwide (Nasdaq: YRCW) – Reported $0.39 vs. $0.31

Today's Earnings Before the Bell:

Arch Coal (NYSE: ACI) – Reported $0.78 vs. $0.64
American Axle (NYSE: AXL) – Reported -$12.49 vs. -$0.84
Black & Decker (NYSE: BDK) – Reported $1.58 vs. $1.41
Coventry Health Care (NYSE: CVH) – Reported $0.55 vs. $0.55
Fortune Brands (NYSE: FO) – Reported $1.25 vs. $1.20
ITT Corp (NYSE: ITT) – Reported $1.19 vs. $1.11
Netflix (Nasdaq: NFLX) – Reported $0.42 vs. $0.41
NBTY (NYSE: NTY) – Reported $0.72 vs. $0.70
T Rowe Price (Nasdaq: TROW) – Reported $0.60 vs. $0.59

News, Upgrades/Downgrades/Brokerage Research:

BlackRock (NYSE: BLK) – Mentioned positively in Business Week
Abercrombie & Fitch (NYSE: ANF) – Downgraded at Bank of America
Tiffany's (NYSE: TIF) – Downgraded at Bank of America
Autonation (NYSE: AN) – Upgraded at Calyon Securities
Juniper Networks (Nasdaq: JNPR) – Upgraded at Citi
TCF Financial (NYSE: TCB) – Fitch downgrades outlook to negative
Ball Corp (NYSE: BLL) – Removed from conviction buy list at Goldman
Viacom (NYSE: VIA) – Upgraded at Goldman
Daimler (NYSE: DAI) – Downgraded at HSBC
Noble Corp (NYSE: NE) – Upgraded at Jefferies
Ensco Intl (NYSE: ESV) – Upgraded at Jefferies
EW Scripps (NYSE: SSP) – Downgraded at JP Morgan
Chipotle Mexican Grill (NYSE: CMG) – Upgraded at Merrill
Delta Airlines (NYSE: DAL) – Upgraded at Merrill
Aeropostale (NYSE: ARO) – Downgraded at Piper Jaffray
Potash (NYSE: POT) – Target reduced at UBS

Disclosure: Mr. Moenning and/or related firms hold long positions in: POT, ROP

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.TopGunsTrading.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.

David D. Moenning
Heritage Capital Management
Main: 630-250-4700
Direct: 303-670-9761
email: DMoenning@HeritageCapitalManagement.com

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Related Entities

• Goldman Sachs Conviction Buy List
• Piper Jaffray
• UBS
• New Home Sales
• Existing-Home Sales
• JPMorgan
• Citi
• Jefferies & Co
• Calyon Securities
• Banc of America
• Fitch Ratings
• David Moenning
• HSBC

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