David Moenning�s Daily State of the Markets: 05/12
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Not If, But When
We all knew it had to happen sometime. With stocks marching merrily higher over the past 2 weeks and encountering little resistance along the way, it was only a matter of time before the bears woke up and said something along the lines of �Hey, wait just a doggone minute here.�
Since April 17th, the bulls had been able to brush aside any and all concerns and the Dow�s move up of close to 600 points went almost uninterrupted. The battle cry was that with the Fed about done (for now anyway, which is something the bulls seemed to leave out all too often lately) the economy would certainly continue to prosper and with earnings providing an excellent rendition of the Energizer Bunny, the bulls were happy campers. And in short, it was all too easy for investors to become complacent. Well, until yesterday anyway.
While the news outlets talked about yesterday�s drop of -142 Dow points being caused by disappointment over the Fed�s decision not to tell us exactly what they are going to do next, the real story has more to do with the way traders operate. You see, yesterday was a classic example of the old saw, �buy the rumor and sell the news.�
With Mr. Bernanke and friends doing a fine job of telegraphing what their plan is (the Fed will likely pause to look at the data for a bit), savvy traders bid up stocks in anticipation of the event. However, as is often the case, they then �sold the news� as they locked in profits from their successful bet after the event took place.
Yesterday can also be classified as something we like to call a �stand aside� day. After a strong run up, the market becomes overbought, investors become overconfident, and the bulls know all too well that their furry counterparts will take a shot at some point. Thus, when the bears actually do grab the ball, buyers have a tendency to stand on the sidelines and let the other team have their fun. It doesn�t make a lot of sense for even the most ardent bulls to jump in too soon during day one of a pullback. The idea is to let the bears do their selling in the hope that they will quickly wear themselves out and provide another buying opportunity. So, on the first day or two of a decline, experienced traders simply stand aside and wait for the selling to subside.
So yes, we should acknowledge that commodity prices are continuing to rise as gold seems destined to take out the very old highs. And yes, the dollar is continuing to struggle, which can be viewed as inflationary. And yes, the situation in Iran is not getting any better. However, these issues were NOT new yesterday and it is therefore tough to pin the sudden drop on concerns over inflation or the Fed doing EXACTLY what everyone expected. No, this was a case of the bulls acknowledging that a pullback was just a matter of time after a strong run-up.
The question of the day is, of course, how long the pullback will last. Frankly, there is never any real way of knowing the answer to this question, so it generally pays to watch the action closely for clues. We�ll be looking at how the bulls and bears play their cards today and Monday to see which team has the better hand.
Turning to this morning, at first blush it would appear that the bears are looking to stretch their legs a little more after being caged up recently. The report on Import Prices was much hotter than anticipated, coming in with a gain of +2.1% which was just about double expectations. In other news this morning, the nation�s trade deficit came in a bit below expectations at $62B, which below analysts� estimates for a reading of $67B.
Running through the rest of the pre-game indicators, all major overseas markets followed Wall Street lower and sport losses in the range of -1.5%. Oil futures are pulling back this morning as the IEA reduced its forecast for worldwide demand for the third time in the last four weeks. At the moment crude is trading down $0.66 to $72.66. Gold is pulling back a bit this morning and may need to rest soon after an explosive move up recently. The yellow metal is quoted at $718 right now. Interest rates are off moving a little higher morning with the 2-year currently trading at 4.99% and the 10-yr is at 5.16%. And finally, with an hour before the bell, stock futures in the U.S. are trying to recover but still sport minor losses. The Dow futures are down 9 points, the S&Ps are off by 2.20, and the NASDAQ futures are sporting a drop of about 7 points.
Stocks �In Play� This Morning:
Kohls (KSS) � Reported $0.48 vs $0.46, Raised guidance
Cheesecake Factory (CAKE) � Upgraded at Lehman
Nvidia (NVDA) � Reported $0.23 vs $0.22, Revenues $681.8M vs. $660.8B
Agco (AG) � Downgraded at JP Morgan
Analog Devices (ADI) � Reported $0.41 vs $0.40, Revenues $643.9 vs. $643.4, Guides higher
BankAtlantic (BBX) � Upgraded at Bear Stearns
Hilton Hotels (HLT) � Mentioned positively in Business Week
Toyota Motors (TM) � Downgraded at BofA
Champion Enterprises (CHB) � Mentioned positively in Business Week
Reinsurance Group of America (RGA) � Upgraded at UBS
Caremark Rx (CMX) � Increases buyback by $1.25B
Pacific Sunwear (PSUN) � Reported $0.16 vs. $0.16
Countrywide Financial (CFC) � Mentioned positively at Credit Suisse
Cisco (CSCO) � Upgraded at Bernstein
Phelps Dodge (PD) � Lehman ups price target
Disclosure: Long positions in stocks mentioned: NVDA, LEH, BSC, CSCO
The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management (HCM) 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.
We all knew it had to happen sometime. With stocks marching merrily higher over the past 2 weeks and encountering little resistance along the way, it was only a matter of time before the bears woke up and said something along the lines of �Hey, wait just a doggone minute here.�
Since April 17th, the bulls had been able to brush aside any and all concerns and the Dow�s move up of close to 600 points went almost uninterrupted. The battle cry was that with the Fed about done (for now anyway, which is something the bulls seemed to leave out all too often lately) the economy would certainly continue to prosper and with earnings providing an excellent rendition of the Energizer Bunny, the bulls were happy campers. And in short, it was all too easy for investors to become complacent. Well, until yesterday anyway.
While the news outlets talked about yesterday�s drop of -142 Dow points being caused by disappointment over the Fed�s decision not to tell us exactly what they are going to do next, the real story has more to do with the way traders operate. You see, yesterday was a classic example of the old saw, �buy the rumor and sell the news.�
With Mr. Bernanke and friends doing a fine job of telegraphing what their plan is (the Fed will likely pause to look at the data for a bit), savvy traders bid up stocks in anticipation of the event. However, as is often the case, they then �sold the news� as they locked in profits from their successful bet after the event took place.
Yesterday can also be classified as something we like to call a �stand aside� day. After a strong run up, the market becomes overbought, investors become overconfident, and the bulls know all too well that their furry counterparts will take a shot at some point. Thus, when the bears actually do grab the ball, buyers have a tendency to stand on the sidelines and let the other team have their fun. It doesn�t make a lot of sense for even the most ardent bulls to jump in too soon during day one of a pullback. The idea is to let the bears do their selling in the hope that they will quickly wear themselves out and provide another buying opportunity. So, on the first day or two of a decline, experienced traders simply stand aside and wait for the selling to subside.
So yes, we should acknowledge that commodity prices are continuing to rise as gold seems destined to take out the very old highs. And yes, the dollar is continuing to struggle, which can be viewed as inflationary. And yes, the situation in Iran is not getting any better. However, these issues were NOT new yesterday and it is therefore tough to pin the sudden drop on concerns over inflation or the Fed doing EXACTLY what everyone expected. No, this was a case of the bulls acknowledging that a pullback was just a matter of time after a strong run-up.
The question of the day is, of course, how long the pullback will last. Frankly, there is never any real way of knowing the answer to this question, so it generally pays to watch the action closely for clues. We�ll be looking at how the bulls and bears play their cards today and Monday to see which team has the better hand.
Turning to this morning, at first blush it would appear that the bears are looking to stretch their legs a little more after being caged up recently. The report on Import Prices was much hotter than anticipated, coming in with a gain of +2.1% which was just about double expectations. In other news this morning, the nation�s trade deficit came in a bit below expectations at $62B, which below analysts� estimates for a reading of $67B.
Running through the rest of the pre-game indicators, all major overseas markets followed Wall Street lower and sport losses in the range of -1.5%. Oil futures are pulling back this morning as the IEA reduced its forecast for worldwide demand for the third time in the last four weeks. At the moment crude is trading down $0.66 to $72.66. Gold is pulling back a bit this morning and may need to rest soon after an explosive move up recently. The yellow metal is quoted at $718 right now. Interest rates are off moving a little higher morning with the 2-year currently trading at 4.99% and the 10-yr is at 5.16%. And finally, with an hour before the bell, stock futures in the U.S. are trying to recover but still sport minor losses. The Dow futures are down 9 points, the S&Ps are off by 2.20, and the NASDAQ futures are sporting a drop of about 7 points.
Stocks �In Play� This Morning:
Kohls (KSS) � Reported $0.48 vs $0.46, Raised guidance
Cheesecake Factory (CAKE) � Upgraded at Lehman
Nvidia (NVDA) � Reported $0.23 vs $0.22, Revenues $681.8M vs. $660.8B
Agco (AG) � Downgraded at JP Morgan
Analog Devices (ADI) � Reported $0.41 vs $0.40, Revenues $643.9 vs. $643.4, Guides higher
BankAtlantic (BBX) � Upgraded at Bear Stearns
Hilton Hotels (HLT) � Mentioned positively in Business Week
Toyota Motors (TM) � Downgraded at BofA
Champion Enterprises (CHB) � Mentioned positively in Business Week
Reinsurance Group of America (RGA) � Upgraded at UBS
Caremark Rx (CMX) � Increases buyback by $1.25B
Pacific Sunwear (PSUN) � Reported $0.16 vs. $0.16
Countrywide Financial (CFC) � Mentioned positively at Credit Suisse
Cisco (CSCO) � Upgraded at Bernstein
Phelps Dodge (PD) � Lehman ups price target
Disclosure: Long positions in stocks mentioned: NVDA, LEH, BSC, CSCO
The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management (HCM) 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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