David Moenning's Daily State of the Markets: 10/13

1,019 Reasons

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

In the old days, the New York Stock Exchange employed humans to make markets in stocks. The idea was that market makers stood ready to buy or sell a round lot of the stock they specialized in as a way to maintain an orderly market. And for a long time, this was a very good gig if you could get it because, by the very nature of the job, you wound up buying into declines and selling into advances.

However, over in four-letterland, better known as the NASDAQ, they decided to do away with all the silly humans and let computer algorithms do the work. Sure, this is more profitable, but if you were around for the ’87 Crash, the mini-crash of 1989, or the bludgeoning in 1990, you got to see firsthand how the computers made the declines much worse than they already were by adding to the volatility.
You see, with computerized trading, the bid-ask is handled by the computer. There is no emotion involved and when selling gets intense, the bids just keep going lower and lower – even if there is no trade at any of the prices. And so, whenever there is a negative event, whoosh – down you go. With humans making a market, there are actually trades being done at various prices and as such, it takes time for prices to move in a big way. But again, the computers skip all of that in favor of speed and profitability.

Frankly, this is a small part of the problem the stock market is experiencing right now. Well, that and the concerns about the global financial system going kaput. But in reality, a good deal of Friday’s volatility was a result of computers doing the trading instead of humans. I hate to sound like an old fogey (and at age 50 I do now qualify as one), but even with the global meltdown that took place overnight on Thursday, it is hard for stocks to drop 462 points in five minutes without the computerized bid/ask system.

Granted, we knew the open was going to be bad. But 697 points in less than 10 minutes? And then, before you could even find your coffee cup (or can of diet coke in my case), the Dow reversed course and found its way to the plus side – all within a matter of 40 minutes. Now THAT’s volatility!

We bring this up because Friday’s intraday volatility was 1,019 points on the Dow, or 11.87% of Thursday’s close. The problem here isn’t that I am against speed, profitability, or progress. No, the issue is that the technicians are jumping up and down about Friday being a “key reversal day,” which, in theory, should mean the direction of the short-term trend has reversed. But, with all the computer driven violence happening, you can’t even be sure the big event was real.

Turning to this morning, the bulls are taking the idea of a key reversal day in the U.S. and running with it. Of course it doesn’t hurt that just about every major country around the globe announced initiatives to shore up their banks over the weekend and are injecting liquidity in their banking systems. So, with some positive chart action in the U.S. and money starting to flow into banks, stocks around the globe are rebounding.

Running through the rest of the pre-game indicators, as we mentioned there are bright green screens everywhere in the overseas markets as Hong Kong is up +10.2%, France is up +5.1%, Germany is higher by +7.2% and London is advancing +3.9%. Crude futures are up with the latest quote showing oil trading higher by $4.40 to $82.10. Interest rates are up on the longer maturities with the yield on the 10-yr currently trading at 3.86% while the yield on the 3-month T-Bill at 0.22% and 3-month LIBOR is at 4.75%. And finally, with about 60 minutes before the bell, the futures in the U.S. are pointing to a nice open for a change. The Dow futures are currently up by about 220 points; the S&P’s are higher by about 30 points, while the NASDAQ looks to be about 49 points above fair value at the moment.

Stocks “In Play” This Morning:

News, Upgrades/Downgrades/Brokerage Research:

Apple (Nasdaq: AAPL) – Upgraded at Bernstein
Royal Dutch Shell (NYSE: RDS.A) – Downgraded at BNP Paribas
Enersis (NYSE: ENI) – Upgraded at BNP Paribas
BP PLC (NYSE: BP) – Downgraded at BNP Paribas

Linear Technology (Nasdaq: LLTC) – Upgraded at Credit Suisse
Manpower (NYSE: MAN) – Upgraded at Deutsche Bank
Robert Half (NYSE: RHI) – Downgraded at Deutsche Bank
Valero (NYSE: VLO) – Downgraded at Deutsche Bank
Petro Canada (NYSE: PCZ) – Downgraded at Goldman Sachs
Sonic Corp (Nasdaq: SONC) – Downgraded at Goldman Sachs
Brinker Intl (NYSE: EAT) – Upgraded at Goldman Sachs
Barnes & Noble (NYSE: BKS) – Upgraded at Goldman Sachs
Baker Hughes (NYSE: BHI) – Upgraded at Goldman Sachs
El Paso Corp (NYSE: EP) – Upgraded at Goldman Sachs
Exxon Mobil (NYSE: XOM) – Upgraded at Goldman Sachs
Marathon Oil (NYSE: MRO) – Downgraded at Goldman Sachs
Murphy Oil (NYSE: MUR) – Downgraded at Goldman Sachs
Schlumberger (NYSE: SLB) – Downgraded at Goldman Sachs
Dow Chemical (NYSE: DOW) – Downgraded at JP Morgan
Covidien (NYSE: COV) – Upgraded at JP Morgan
St. Jude Medical (NYSE: STJ) – Upgraded at JP Morgan
British American Tobacco (NYSE: BTI) – Upgraded at Merrill Lynch
Chipotle Mexican Grill (NYSE: CMG) – Downgraded at Merrill Lynch
Credit Suisse (NYSE: CS) – Upgraded at Merrill Lynch
General Motors (NYSE: GM) – Downgraded at Merrill Lynch
Las Vegas Sands (NYSE: LVS) – Upgraded at Merrill Lynch
MGM Mirage (NYSE: MGM) – Upgraded at Merrill Lynch
Royal Bank Scotland (NYSE: RBS) – Upgraded at Merrill Lynch
Sonic Automotive (NYSE: SAH) – Downgraded at Merrill Lynch
GameStop (NYSE: GME) – Upgraded at Piper
Hewitt Assoc (NYSE: HEW) – Upgraded at UBS
Automatic Data Processing (NYSE: ADP) – Downgraded at UBS
Paychex (Nasdaq: PAYX) – Downgraded at UBS

Disclosure: Mr. Moenning and/or related firms hold long positions in: COV

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.

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