David Moenning's Daily State of the Markets: 10/20

A Day of Rest?

After an insanely wild ride over the past couple of weeks, Friday appeared to be a day of rest for the markets. Although, I will have to admit that a drop of 127 points or 1.4% isn’t normally something you just shrug off as unimportant. However, given the violence we’ve seen lately, Friday’s intraday volatility of a mere 550 points seemed a little on the light side.

One of the major reasons for our assessment is that the results of Friday’s trading did nothing to impact the charts. On a chart basis, it looked like a lighter volume day of consolidation, which, believe it or not, is actually a good thing right now.

Our thinking is this was the type of day that helps the bulls argue that last Friday’s key-reversal day will wind up marking the low of the move. As we’ve been saying, if October 10th was the low, then we are currently in the retest phase of the cycle. And as long as the move back down occurs on lighter volume and doesn’t violate the old low to any great degree, the action is actually constructive and part of the bottoming process.

This is not to say that we’re assuming the bottom is in. Our view is the only way to know such things is with a healthy dose of hindsight. So we will continue watch the action and try to ascertain if the type of bottoming pattern that has played out in the past remains on track here.

Friday’s market was actually a mixed bag of news highlighted by another batch of volatility tied to an option expiration event. The good news is that the credit markets appear to be acting better. The California deal got done. LIBOR is behaving. Bank lending increased slightly on Friday. Mortgage rates aren’t rising but T-Bill rates are. All of which argue in favor of the view that the credit markets seem to be thawing a bit.

The bad news is that Friday’s economic data wasn’t encouraging. Yes, we know that the current data is looking backward to a time that we know was weak. However, with Housing Starts falling to their lowest level since 1991 and Building Permits falling to their worst level since 1981, it is hard to get excited about a housing market recovery any time soon.

In addition, the University of Michigan’s Consumer Sentiment Index was no picnic either. The Index dropped a whopping 12.8 points to a reading of 57.5. This was the biggest decline since March 1974 and the second largest drop on record. And to put this in perspective, the stats geeks out there (we know who we are) will appreciate the fact that this was a 3.7 standard deviation event. In other words, consumer sentiment appears to have tanked.

But again, as long as the charts hold up, the bulls have a shot at turning this thing around in the coming weeks.

Turning to this morning, the mood has improved somewhat as investors begin to recognize that the $3.3 trillion dollars pledged by governments around the globe is probably going to have a positive impact eventually. In addition, we’ll get more Fedspeak today as Bernanke testifies before the House Budget committee while Atlanta Fed Chairman Lockhart will speak on the economic outlook at 12:45 pm.

Running through the rest of the pre-game indicators, the major overseas markets are higher across the board. Crude futures are up with the latest quote showing oil trading higher by $1.86 to $73.71. On the interest rates board, we’ve got the yield on the 10-yr currently trading at 3.96% while the yield on the 3-month T-Bill is at 0.82% and overnight LIBOR is at 1.51%, which is down from Friday’s 1.67%. And finally, with about 60 minutes before the bell, stock futures in the U.S. are pointing to an up open. The Dow futures are currently ahead by about 80 points; the S&P’s are up by about 13 points, while the NASDAQ looks to be about 16 points above fair value at the moment.

Stocks “In Play” This Morning:

Today’s Earnings Before the Bell:

Eaton (NYSE: ETN) – Reported $1.95 vs. $1.89
Halliburton (NYSE: HAL) – Reported $0.76 vs. $0.74
Hasbro (NYSE: HAS) – Reported $0.89 vs. $0.86
Mattel (NYSE: MAT) – Reported $0.66 vs. $0.71
Weatherford Intl (NYSE: WFT) – Reported $0.55 vs. $0.53

News, Upgrades/Downgrades/Brokerage Research:

Caterpillar (NYSE: CAT) – Downgraded at Bank of America
Terex (NYSE: TEX) – Downgraded at Bank of America
Pfizer (NYSE: PFE) – Upgraded at Barclays
MDC Holdings (NYSE: MDC) – Upgraded at Citi
Monster Worldwide (Nasdaq: MNST) – Downgraded at Citi
Cablevision (NYSE: CVC) – Upgraded at Citi
Ericsson (Nasdaq: ERIC) – Upgraded at Credit Suisse
CNOOC (NYSE: CEO) – Downgraded at Deutsche Bank
Boeing (NYSE: BA) – Target reduced at Deutsche Bank
Kroger (NYSE: KR) – Upgraded at Friedman Billings
Marsh & McLennan (NYSE: MMC) – Added to Conviction Buy list at Goldman
Applied Materials (Nasdaq: AMAT) – Added to Conviction Buy list at Goldman
Waste Management (NYSE: WMI) – Added to Conviction Buy list at Goldman
Prudential (NYSE: PRU) – Added to Conviction Sell list at Goldman
MetLife (NYSE: MET) – Downgraded at Goldman
Best Buy (NYSE: BBY) – Upgraded at Goldman
Intel (Nasdaq: INTC) – Downgraded at Goldman
Pactiv (NYSE: PTV) – Downgraded at Merrill
Cisco Systems (Nasdaq: CSCO) – Upgraded at Morgan Keegan
Transocean (NYSE: RIG) – Upgraded at Morgan Stanley
Deere (NYSE: DE) – Downgraded at Morgan Stanley
Symantec (Nasdaq: SYMC) – Upgraded at Oppenheimer
Kraft (NYSE: KFT) – Upgraded at UBS

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

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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