David Moenning's Daily State of the Markets: 06/05

Asian Contagion Averted

Good morning. In late February, stocks sold off for three reasons. First, there was the fact that stocks had run up a long way and were overbought. Second, there was fear that the problems in the subprime mortgage market would spread. And finally a swoon in the Chinese stock market sent ripples of selling around the world and created concerns about a global market meltdown.

So, with stocks once again overbought by just about any measure you'd like to use and stocks in Shanghai plunging overnight, one might have expected some selling in the West and maybe a little worry about another Asian Contagion.

But while stocks did spend much of the session modestly lower yesterday, at the end of the day, there were green screens all around and we were talking about yet another record close for the major indices.

While it may sound odd that investors here in the U.S. wound up ignoring an 8.3% drop in the Shanghai composite, if one fully understands the structure of the Chinese market, it becomes clear that there was no reason for another Asian Contagion to take place. You see, since the Shanghai market is closed to outsiders, there is really no reason for there to be any ripple affect in the West.

In addition, the Chinese government has made it clear recently that it wants to curb some of the speculative froth taking place in the Shanghai market. There's been lots of talk from government officials about bubbles and last week, the tax on stock transactions was increased by a fair amount. So, given the fact that the Shanghai composite has soared something in the vicinity of 270% in the past couple of years, it isn't exactly surprising to see a pullback now and then.

Speaking of pullbacks, anyone who has been around the block a time or two knows that we are overdue for one here in the U.S. So, although investors were able to shake off concerns about China and stocks wound up with new record closes all around yesterday, we probably shouldn't get too overconfident about the action.

However, on the other hand, after the nice run we've had recently, it is actually a positive that the bears were once again unable to get anything going to the downside. So, to sum up, we will have to continue to give the bulls the benefit of the doubt for now.

Turning to this morning, there is no economic data before the bell, but we will get the ISM's Non-manufacturing Index at 10:00. Stocks are on the sluggish side so far in the early going and it looks like the bears will try and take another shot today.

Running through the rest of the pre-game indicators, the major foreign markets are mixed by region with Asian stocks higher while Europe is a little lower. Gold futures are moving up by $2.00 to $678.30. In the oil pits, crude futures are moving down a little with the latest quote at $65.81. Interest rates are moving up this morning with the yield on the 10-year currently trading at 4.95%. And finally, with about an hour before the bell, stock futures in the U.S. are looking weak. The Dow futures are currently off by about 40 points; the S&P's are 5 points underwater, while the NASDAQ looks to be 6 points below fair value at the moment.

Stocks "In Play" This Morning:

News, Upgrades/Downgrades/Brokerage Research:*

Avaya (NYSE: AV) - Agrees to buyout from Silver Lake
General Mills (NYSE: GIS) - Downgraded at Bear Stearns
Trump Entertainment (NASDAQ: TRMP) - Downgraded at Bear Stearns
Bed Bath & Beyond (NASDAQ: BBBY) - Downgraded at Goldman Sachs
Advance Auto Parts (NYSE: AAP) - Upgraded at JP Morgan
Hasbro (NYSE: HAS) - Downgraded at JP Morgan
Franklin Resources (NYSE: BEN) - Downgraded at JP Morgan
Dow Chemical (NYSE: DOW) - Upgraded at Lehman
XTO Energy (NYSE: XTO) - Price target increased at UBS
Occidental Petroleum (NYSE: OXY) - Price target increased at UBS
Juniper Networks (NASDAQ: JNPR) - Downgraded 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: http://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.

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