David Moenning's Daily State of the Markets: 5/8

May 9, 2008 10:33 AM EDT

Test Time!

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

As we near the end of the school year, every kid probably knows exactly how many days there are left in the year. As for my youngest, who is now a freshman in high school, her magic number is 15. However, with the end of the year comes those pesky final exams, which tend to put a damper on the celebrations.

It’s also test time for the stock market as the venerable Dow Jones Industrial Average appears to be testing the all-important breakout zone right now. And while there are no letter grades given for this type of a test, the results will be watched very closely by both teams.

The concept here, at least from a technical analysis standpoint, is that old resistance traditionally becomes new support after a breakout. You see, when a security breaks out of a trading range, the area which represented resistance during the time spent in the range is supposed to become support once it breaks out of the range. And as such, the textbooks tell us that stocks “should� hold above the all important old highs. However, if the security in question dives back into the trading range, the breakout becomes nullified and you wind up with an expanded top to the trading range.

So, although yesterday’s bounce higher of 52 points appeared to be largely insignificant after Wednesday’s dive, it was positive that the Dow bounced up right where it was supposed to.

Thursday’s trading was really a mixed bag from a news standpoint. Stocks initially bounced on the retail sales numbers that came in largely better than expected. And the fact that oil was declining from its recent lofty prices also gave traders a small reason to be optimistic.

But with oil prices resuming their upward march on the back of strength in the Euro, the enthusiasm for stocks waned a bit in the afternoon. And with oil closing at yet another record of $123.69, it is fairly easy to see why the bears are suggesting that the upside for stocks might be limited.

And with the ECB telling anyone that will listen about the evils of inflation and how they must remain vigilant, the chances for a continuation of the recent dollar rally and a corresponding decline in crude don’t appear to be all that great.

Turning to this morning, sharpen your pencils and grab your calculator because it looks like we’ve got one of those big tests on our hands. AIG came out with a simply miserable report and announced that they needed to raise $12.5 billion. Couple this with yet another record for crude prices and it is little wonder that stock prices are on the defensive.

Running through the rest of the pre-game indicators; the foreign markets are down hard across the board on the AIG news. Crude futures are moving up strongly with the latest quote showing oil trading up $1.24 to $124.93. Interest rates are moving down as the yield on the 10-yr is currently trading at 3.74%. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to lower open. The Dow futures are currently off by about 120 points; the S&P’s are down about 13 points, while the NASDAQ looks to be about 15 points below fair value at the moment.

Stocks “In Play� This Morning:

Yesterday’s Earnings After the Bell:

American Intl Group (NYSE: AIG) – Reported -$3.09 vs. $1.45
Activision (Nasdaq: ATVI) – Reported $0.17 vs. $0.05
Mylan Labs (NYSE: MYL) – Reported $0.09 vs. $0.08
Nvidia (Nasdaq: NVDA) – Reported $0.30 vs. $0.32
Priceline (Nasdaq: PCLN) – Reported $0.76 vs. $0.60
Ralston Holdings (NYSE: RAH) – Reported $0.86 vs. $0.84
Verisign (Nasdaq: VRSN) – Reported $0.21 vs. $0.20

Today’s Earnings Before the Bell:

Sotheby’s (NYSE: BID) – Reported -$0.19 vs. $0.10
Leap Wireless (Nasdaq: LEAP) – Reported -$0.27 vs. -$0.04

News, Upgrades/Downgrades/Brokerage Research:

American Intl Group (NYSE: AIG) – Announces plans to raise $12.5 Billion
Oceaneering Intl (NYSE: OII) – Mentioned positively in Barron’s
Teco Energy (NYSE: TE) – Upgraded at Citi
Activision (Nasdaq: ATVI) – Upgraded at Cowen
Celgene (Nasdaq: CELG) – Downgraded at Credit Suisse
Imperial Tobacco (NYSE: ITY) – Upgraded at Credit Suisse
McDonalds (NYSE: MCD) – Removed from Conviction Buy list at Goldman
Burger King Holdings (NYSE: BKC) – Added to Conviction Buy list at Goldman
Hess Corp (NYSE: HES) – Upgraded at Lehman
HSBC Holdings (NYSE: HBC) – Downgraded at Morgan Stanley

Mr. Moenning holds Long positions in stocks mentioned: CELG

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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• Goldman Sachs Conviction Buy List
• Credit Suisse
• Citi
• Morgan Stanley

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