David Moenning's Daily State of the Markets: 5/15

May 15, 2009 9:34 AM EDT

Trying to Decide

In reality, days like Thursday are kind of tough to take much out of. Stocks had sold off for three straight days so the bulls argue that a bounce was to be expected. And since the bears actually had some weak data to work with, our heroes in horns suggest that yesterday was a moral victory for their side. However, their opponents contend that the rebound was lame and the action points to more selling ahead.

While we understand that simply saying “it could go up, it could go down, or…” isn’t much help, it is important to recognize that the market isn’t always talking – or put another way; it isn’t always saying much of anything important. So, we’re going to chalk up yesterday’s little rally to the market trying to decide which way to go from here.

Before we get to any further prognostications, we should probably point out that Thursday’s action did snap a three day losing streak but that there didn’t appear to be an overriding theme. We got some better than expected numbers from retailers, there was finally a reprieve of secondary offerings, the Libor spread continued to fall (a good thing), and while this may not be on your daily radar, the Baltic Dry Index (a measure of the amount of goods being shipped) increased for the 10th straight reporting period.

The early headlines included the disappointing data points from the PPI and weekly jobless claims which were the first interruptions in the “the turn is here” party that the bulls have been sponsoring. And while the bears were quick to point to the data as proof that things aren’t getting better in the economy, we need to remember that this is normal during this bottoming process. Some reports will be a bit better and some will be weaker. However, the key to the direction things will go from here, will be the reports that come in outside the expectations.

On that note, we’d like to take a moment to comment on the current consensus on what to expect from the stock market. First of all, the crowd looking for a rally on March 10th was a little thin. If you will recall, most thought the sky was falling at that time. But, of course, after a 30% pop higher, this bandwagon has now gotten a little crowded. With the big rally came an overbought condition and this caused everyone to begin looking for a pullback. But, as is often the case with the stock market, the wait for the pullback, correction, retest, or whatever you’d like to label it, has been arduous.

Our theory has been that the underinvested mutual fund managers, who, unlike their fast-money hedge fund brethren, do NOT bomb into positions quickly, have been responsible for the lack of a dip in the market. And with just about everybody on TV telling us that the much anticipated dip is going to be shallow and not to be feared, we are a little concerned that this stance has become a little too popular.

So, we’d like to throw out the following idea as something to keep in the back of your mind. Since no one expects any pullback in the market to be severe, what happens when we get some piece of data that shows the economy continuing to worsen? Might that cause the late-to-the-party bulls to bail and create a pullback that generates some fear? We’re not suggesting that this will happen, but we really don’t like it when everyone agrees with our thesis.

Turning to this morning, the CPI numbers came in on target with an unchanged reading, although the core rate was a couple tenths higher than expectations at +0.3%. In addition, the May Empire Manufacturing index was reported at -4.55, which was better than expectations for -12 and last month’s reading of -14.65.

Running through the rest of the pre-game indicators, the major overseas markets are mixed by region. Crude futures are moving down with the latest quote showing oil trading lower by $1.19 to $57.43. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.10%, while the yield on the 3-month T-Bill is trading at 0.15%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a lower open. The Dow futures are currently off by about 40 points; the S&P’s are down about 5 points, while the NASDAQ looks to be about 16 points below fair value at the moment.

Stocks “In Play” This Morning:

Today’s Earnings Before the Bell:

Abercrombie & Fitch (NYSE: ANF) – Reported -$0.41 vs. -$0.12
JC Penney (NYSE: JCP) – Reported $0.11 vs. $0.11

Upgrades/Downgrades/Brokerage Research:

Zales (NYSE: ZLC) – Upgraded at BofA/Merrill
CBS Corp (NYSE: CBS) – Upgraded at Barclays
Viacom (NYSE: VIA.B) – Upgraded at Barclays
Oil States (NYSE: OIS) – Upgraded at Credit Suisse
Sherman Williams (NYSE: SHW) – Upgraded at Goldman
PACCAR (PCAR) – Downgraded at HSBC
Coca Cola Enterprises (NYSE: CCE) – Downgraded at JP Morgan
AFLAC (NYSE: AFL) – Downgraded at Morgan Stanley
Camden Property (NYSE: CPT) – Upgraded at RBC Capital
Mid America Apartment (NYSE: MAA) – Downgraded at RBC Capital
Wellpoint Inc (NYSE: WLP) – Target increased at UBS
LM Ericsson (Nasdaq: ERIC) – Upgraded at UBS

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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