David Moenning's Daily State of the Markets: 5/27

Confidence Begets Confidence

There are times when trying to identify the reason behind the market’s movement can be a challenge. However, yesterday was not one of those times. At 10:00 am Eastern the Conference Board released its report on Consumer Confidence and 20 minutes later the Dow was 140 points higher. And by the end of the day, there were green screens all around with most indices up around +3% or more.

Was it a coincidence that the market blasted up after the report, you ask? Well, as they like to say in those Hertz commercials; Not exactly! You see, this economic report didn’t contain data showing that the economy was simply “sucking less.” No, this report showed actual improvement in the driving force behind the economy and showed that consumers have – brace yourself – expectations for a brighter future.

The report on Consumer Confidence came in significantly above economists’ best guesses and leapt 14.1 points in May to its best reading since Lehman failed. And for those statistical aficionados out there, you will certainly appreciate the fact that May’s advance was a 2.5 standard deviation event! In short, this means that the jump in the consumer confidence index this month was a biggie.

The Conference Board's Consumer Confidence survey covers 5000 households and is a weighted average of two indexes, one covering current conditions (40%) and one looking at expectations for the future (60%). It was the latter that powered the move higher as the Consumer Expectations Index skyrocketed 21.3 points, which, for those of you keeping score at home, was a 3.8 standard deviation event. Finally, it should be noted that there wasn’t a single “yea, but” in the report as confidence improved for all age groups and income categories, and in all nine regions of the country.

So, given that the consumer is responsible for a healthy chunk of the nation’s GDP, if John Q. Public is feeling better about the future, it doesn’t take a Ph.D. in finance to recognize the reason for Tuesday’s rally.

While it was impressive that stocks were able to simply ignore North Korea’s fun and games with missiles and bombs as well as the usually downbeat Case-Shiller housing report, Tuesday’s blast didn’t do too terribly much from a chart standpoint. For starters, volume was on the light side. But more importantly, the move was a range-rider’s dream as anyone jumping in at the bottom of the range enjoyed the day’s pop higher toward the upper end of the month-old trading range.

So, where do we go from here? With resistance overhead and a clear trading range developing, our view is that it will depend on the data. Give us some reports that show actual improvement in the economy and traders will pop this thing right through the top of the range. However, anything that suggests that the rose colored glasses may not be warranted will likely push us back to the lower end of the range – or worse.

Turning to this morning, we don’t have any economic news before the bell but we will get more data on housing and consumer sentiment at 10:00 am. On the news front, Bank of America (BAC) just announced that it has raised $26 billion in new capital so far and is well on its way to reaching the $33.9 billion required by the stress tests.

Running through the rest of the pre-game indicators, the major overseas markets are up by varying degrees with Asia up strong and Europe on slightly so. Crude futures are moving higher with the latest quote showing oil trading up $0.34 at $62.79. On the interest rate front, we’ve got the yield on the 10-yr continuing to move higher at 3.52%, while the yield on the 3-month T-Bill is trading at 0.16%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a modestly lower open. The Dow futures are currently off by about 10 points; the S&P’s are down about 2 points, while the NASDAQ looks to be about 7 points below fair value at the moment.

Stocks “In Play” This Morning:

Today’s Earnings Before the Bell:

American Eagle (NYSE: AEO) – Reported $0.08 vs. $0.07
AutoZone (NYSE: AZO) – Reported $3.13 vs. $2.89

Cracker Barrel (Nasdaq: CBRL) – Reported $0.52 vs. $0.44
Chicos FAS (NYSE: CHS) – Reported $0.11 vs. $0.08
Dollar Tree (Nasdaq: DLTR) – Reported $0.66 vs. $0.60
Ralph Lauren (NYSE: RL) – Reported $0.44 vs. $0.40
Staples (Nasdaq: SPLS) – Reported $0.22 vs. $0.21

Upgrades/Downgrades/Brokerage Research:

Petro-Canada (NYSE: PCZ) – Upgraded at Barclays
Marathon Oil (NYSE: MRO) – Downgraded at Barclays
Goldman Sachs (NYSE: GS) – Target and estimates increased at Credit Suisse
Regions Financial (NYSE: RF) – Upgraded at Deutsche Bank
Companhia Vale do Rio Doce (Nasdaq: VALE) – Downgraded at Goldman
Citrix Systems (Nasdaq: CTXS) – Downgraded at JP Morgan
Big Lots (NYSE: BIG) – Downgraded at JP Morgan
Principal Financial Group (NYSE: PFG) – Upgraded at Morgan Stanley
MetLife (NYSE: MET) – Target increased at Morgan Stanley
Prudential (NYSE: PRU) – Target increased at Morgan Stanley
Bank of America (NYSE: BAC) – Estimates reduced at Rochdale
Apple (Nasdaq: AAPL) – Mentioned positively at RBC Capital
Harmony Gold (NYSE: HMY) – Downgraded at UBS
Monsanto (NYSE: MON) – Estimates reduced at UBS

Long positions in stocks mentioned: JPM, AEO, AAPL

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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