Daily State of the Markets 01/21: What's It Mean?

Good morning. After the last two sessions, during which time the stock market has moved in a southerly direction (something it hasn't done in quite some time, I might add) the key question on the minds of investors just might be: What does it mean (if anything)?

Given the exuberance displayed by the bulls and/or the flat-out incompetence of the bears seen over the past six or seven weeks, there is also a decent chance that most investors haven't given this little pullback much attention. After all, the venerable DJIA is a mere 16 points away from the multi-year high it set on Tuesday. So, what's the big deal, right?

While there is a very strong chance that this will turn out to be just a little pothole on the road to stock market prosperity in 2011, I can say that this particular bout of selling is a bit different than anything we've seen recently. You see, outside of the beloved Dow, there has been some nastiness happening. For example, while the DJIA is off just a fraction from its highs (-0.13 to be exact), the NASDAQ is off -2.2% over the past two days, the Midcaps have fallen -2.5%, and the Russell 2000 smallcap index has been tagged for a loss of -3.7%.

However, the progressively larger declines seen in the broader market indices don't even tell the whole story as many of the market's leading issues have been body slammed since Tuesday. But to be fair, the stocks getting smoked are the very same issues whose charts have 'gone parabolic' over the last few months. Thus, it is easy to suggest that some profit-taking and perhaps some short-selling of the leaders is natural right about now.

There is also the distinct possibility that I'm reading too much into this as a little something called mean reversion is definitely part of this game. But my point is that the current action smacks of the fast-money types rotating out of stocks like Rovi Corp (Nasdaq: ROVI) and Apple (Nasdaq: AAPL) (both of which I own in portfolios I manage) and into the former yawners such as Home Depot (NYSE: HD) and Wal-Mart (NYSE: WMT).

Other issues that may be coming into play and becoming market drivers here include the macro concern relating to China moving to try and tighten up the reins on asset appreciation and inflation. It is worth noting that (a) the Shanghai stock market did not react well to another GDP report showing the economy to be growing at double-digit rates and (b) that there are other emerging markets also starting to play the tightening game.

Next up is the issue of expectations. Since it is earnings season, the game of expectations versus reality is clearly in full swing. And while the earnings parade so far has once again been an impressive display, there is some talk making the rounds that the expectations might be getting a little ahead of reality in some areas.

So, when you mix in the recent overbought condition, the extremely upbeat sentiment, some profit taking, the rotation, some macro concerns, and the idea that the expectations may be inching toward the exuberance zone, the answer to the question posed in this morning's title is clear. In short, the current action means it isn't surprising to see things getting a little sloppy right about now. And as a card-carrying member of the glass-is-half-full club, it is my hope that the current sloppiness doesn't turn into something more meaningful. We shall see...

Turning to this morning... Futures are movin' on up on the back of earnings from Google (Nasdaq: GOOG) and General Electric (NYSE: GE) as well as news that Spain is taking steps to restructure the banking system and would be willing to invest directly in the banks. In addition, David Tepper is on CNBC saying good things about America and the U.S. stock market again.

On the Economic front... There is no economic news scheduled for release today.

Thought for the day: Best of luck on this Friday and be sure to enjoy the weekend!

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

* Major Foreign Markets:
o Australia: -0.64%
o Shanghai: +1.43%
o Hong Kong: -0.53%
o Japan: -1.56%
o France: +1.63%
o Germany: +1.07%
o London: +0.76%

* Crude Oil Futures: - $0.10 to $89.49
* Gold: - $4.20 to $1342.30
* Dollar: higher against the Yen, lower vs Pound and Euro
* 10-Year Bond Yield: Currently trading at 3.418%

* Stocks Futures Ahead of Open in U.S. (relative to fair value):
o S&P 500: +5.19
o Dow Jones Industrial Average: +40
o NASDAQ Composite: +11.92

Wall Street Research Summary

Upgrades:

* Boyd Gaming (NYSE: BYD) - Argus
* CarMax (NYSE: KMX) - Credit Suisse
* Rockwell Collings (NYSE: COL) - Credit Suisse
* Google (GOOG) - Target increased to $800 at Jefferies, Target increased to $715 at Oppenheimer
* CNA Financial (NYSE: CNA) - Macquarie
* The Traverlers (NYSE: TRV) - Macquarie
* Cabot Oil & Gas (NYSE: COG) - Morgan Stanley
* Polycom (Nasdaq: PLCM) - RBC Capital
* Shaw Group (Nasdaq: SHAW) - RW Baird
* Silgan Holdings (Nasdaq: SLGN) - RW Baird
* Eaton (NYSE: ETN) - RW Baird

Downgrades:

* Wipro (NYSE: WIT) - BofA/Merrill
* Frontier Oil (NYSE: FTO) - BofA/Merrill
* Hess Corporation (NYSE: HES) - BofA/Merrill
* Valero Energy (NYSE: VLO) - BofA/Merrill
* ProLogis (NYSE: PLD) - Barclays
* Freeport-McMoRan (NYSE: FCX) - Citi
* General Maritime (NYSE: GMR) - JPMorgan
* Frontline (NYSE: FRO) - JPMorgan
* Nordic American Tanker (NYSE: NAT) - JPMorgan
* Overseas Shipholding (NYSE: OSG) - JPMorgan
* Aspen Insurance (NYSE: AHL) - Macquarie
* Intersil (Nasdaq: ISIL) - Oppenheimer
* Chubb (NYSE: CB) - RBC Capital
* Sonoco Products (NYSE: SON) - RW Baird

Yesterday's Earnings After the Bell

Company
Symbol
EPS Reuters
Estimate
Advanced Micro AMD $0. $0.06
Capital One COF $1.53 $1.35
Flextronics FLEX $0.25 $0.24
Google GOOG $8.75 $8.09
International Game Technology IGT $0.25* $0.25
Intuitive Surgical ISRG $3.02 $2.26
Maxim Integrated MXIM $0.44 $0.41
People's United Financial PBCT $0.09 $0.10

Earnings Before the Bell

Company
Symbol
EPS Reuters
Estimate
Air Products APD $1.35 $1.34
Bank of America BAC $0.04* $0.15
First Horizon National FHN -$0.20 -$0.01
General Electric GE $0.36 $0.32
Schlumberger SLB $0.85 $0.77
SunTrust Banks STI $0.23 $0.08

Long positions in stocks mentioned: FCX

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