David Moenning's Daily State of the Markets: 4/21

April 21, 2008 10:14 AM EDT

Breakout or Fakeout?

Here's a link to listen to an Audio Version of the report: http://PlayAudioMessage.com/play.asp?m=498533&f=ERYCPD&ps=13&c=FFFFFF&pm=2&h=25

For the fourth day in a row, both the Dow and S&P 500 closed out the session with green screens on Friday. However, Friday’s gain of 228 points was a bit more important than most this year as the Dow managed to power through the top end of the trading range that has been in place since the middle of January.

The reason behind the move was a handful of earnings reports that contained those three little words that investors love to hear during an earnings parade: “better than expected.” Companies reporting results that exceeded the Reuter’s estimates Friday included Google (GOOG), Caterpillar (CAT), and Honeywell (HON). And then, to the surprise of many, the report from Citigroup (C) was by no means the disaster that had been anticipated.

While the bulls appeared to be very pleased with their handiwork as the closing bell rang, things actually could have been better. You see, although the Dow managed to break out of the trading range, none of the other major indices joined in on the fun. And while technicians will extend the NASDAQ, S&P, and Russell a little time to get ‘er done, time is of the essence here for the confirmations to occur.

Next, the textbooks tell us that a true breakout should occur on impressive volume, which, to me anyway, would be somewhere in the 2 billion share range. And although the volume did pick up a bit on Friday, this was largely due to the fact that it was an options expiration day and not to an increase in buying interest.

Finally, while it was nice to see the dollar rally for a change, the fact that crude reversed an early decline to finish up $1.83 to $116.69 definitely helped to keep the celebration in check on Friday.

So, is this the long awaited breakout, which would indicate that higher prices are on the horizon or simply another head fake designed to punish our heroes in horns? In reality, no one knows for sure. However, it is a pretty safe bet that the results of the earnings parade will have a say in answering the question.

In sum, it is okay to be leaning bullish here. However, the "Breakout fakeout" is one of the cruelest weapons the bears have at their disposal, so it might be best to stay on our toes for a while.

Turning to this morning, unlike Citigroup’s results, Bank of America's (BAC) quarter came in at just a hair over one-half the expectations, which is causing some traders to reconsider the potential for further upside.

Running through the rest of the pre-game indicators; the foreign markets are split by region with Asia up and Europe down. Crude futures are moving up a smidge with the latest quote showing oil higher by $0.13 to $116.82. Interest rates are lower with the 10-yr trading at a yield of 3.74% so far. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to down open. The Dow futures are currently off by about 60 points; the S&P’s are down about 6 points, while the NASDAQ looks to be about 9 points below fair value at the moment.

Stocks "In Play" This Morning:

Today’s Earnings Before the Bell:

Arch Coal (NYSE: ACI) – Reported $0.56 vs. $0.46
Bank of America (NYSE: BAC) – Reported $0.23 vs. $0.45
Quest Diagnostics (NYSE: DGX) – Reported $0.72 vs. $0.70
Halliburton (NYSE: HAL) – Reported $0.64 vs. $0.64
Eli Lilly (NYSE: LLY) – Reported $0.92 vs. $0.96
Merck (NYSE: MRK) – Reported $0.89 vs. $0.86
Weatherford Intl (NYSE: WFT) – Reported $1.01 vs. $1.00

News, Upgrades/Downgrades/Brokerage Research:

Imperial Tobacco (NYSE: ITY) – Upgraded at Citi
Caterpillar (NYSE: CAT) – Downgraded at Credit Suisse, Wachovia
Albemarle Corp (NYSE: ALB) – Upgraded at Goldman
GameStop (NYSE: GME) – Downgraded at Goldman
Marriott (NYSE: MAR) – Downgraded at Goldman
Barclays (NYSE: BCS) – Downgraded at Merrill
Progressive Corp (NYSE: PGR) – Downgraded at Merrill
Schlumberger (NYSE: SLB) – Upgraded at Morgan Stanley
Wells Fargo (NYSE: WFC) – Downgraded at Oppenheimer

Mr. Moenning holds 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.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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• Credit Suisse
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• Morgan Stanley
• Wachovia
• Banc of America

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