Daily State of the Markets 5/18: Is That It?

Good morning. The questions stock market investors - especially those who watch the action on the charts - are probably asking after yesterday's action are: Is that it? Does Monday's reversal mean that the corrective phase is over? Is it finally safe to head back into the pool?

Many times, a corrective phase will end on what is called a "key reversal" day where stocks start the day down hard in reaction to some news relating to whatever the current crisis is focused on, but then reverse higher on strong volume. This type of action is a signal to traders that stocks are "sold out" and the recent declines have fully discounted whatever bad news may still be out there.

While it is true that stocks did reverse an early 184 point dive on the Dow and managed to claw their way back into the plus column by the time the closing bell rang, there are a couple of problems with labeling yesterday's action as a Key Reversal day. First and foremost, the volume component of the formula for a "key" reversal just wasn't there. While volume was strong for a Monday, we didn't see the type of emotional washout that generally occurs in conjunction with a "key" reversal day.

In addition, yesterday's rebound was really all about the Euro. Thus, it is hard to argue that the sellers had exhausted themselves by the time the lunch bell rang. Instead, it appears as if traders were merely tying their activities to the fate of the EU's currency. So, while the market could easily head higher from here, it is important to understand that the stock market's future appears to be tied to the fate of the Euro at the present time.

Why do we care, you ask? In short, because investors currently view the Euro as a proxy for confidence in the economies of the EU. For obvious reasons, the Euro has been diving lately as investors fear the EU/IMF bailout simply won't be enough and that civil/political unrest may cause the EU to fall apart. In the last 10 trading days alone, the Euro has fallen more than -6% and was once again making a new low yesterday.

However, right about noon eastern time Monday, the Euro suddenly found its footing and began to rise. And in short, the stock market indices followed suit - tick for tick.

So, while the stock market certainly has some room to roam to the upside before bumping into serious resistance again, the key thing to understand at this stage of the game is that the Euro appears to be the current driver of the action. And for those of you that don't have access to currency quotes and charts, simply watching the symbol FXE (CurrencyShares Euro Trust) will do the trick.

Turning to this morning... The Labor Department reported the Producer Price Index (an indication of inflation at the wholesale level) for April fell by -0.1%, which was below the consensus estimate for an increase of +0.1% and March’s surprise reading of +0.7%. When you strip out food and energy, the so-called Core PPI came in up +0.2%, which in line with the consensus for +0.1% (and March’s +0.1%).\

In addition, Housing Starts rose 5.8% in April to an annualized rate of 672K, which was above the consensus for 650K. The March numbers were revised higher to an annualized rate of 635K from 626K.

Building Permits for April fell -11.5% to 606K. This was well below than the consensus of 680K and the March total of 685K.

Finally, please accept our best wishes for a pleasant day...

Pre-Game Indicators
Here are the important indicators we review each morning before the opening bell...
• Foreign Markets: With the exception of Australia, up across the board
• Crude Oil Futures: +$1.95 to $72.03
• Gold: -$19.50 to $1208.60
• Dollar: Lower against Yen and Euro, higher vs. Pound
• 10-Year Bond Yield: Currently trading up at 3.48%
• Stocks Futures Ahead of Open in U.S. (relative to fair value):
o S&P 500: +7
o Dow Jones Industrial Average: +50
o NASDAQ Composite: +11

Yesterday's Earnings

Agilent A $0.43 $0.41
Lowe's LOW $0.34 $0.31

Earnings Before The Bell

Abercrombie & Fitch ANF -$0.13 -$0.13
Home Depot HD $0.45 $0.40
Wal-Mart WMT $0.88 $0.84

* Report includes items that make comparisons to the consensus estimate questionable

Wall Street Research Summary
Upgrades:
• LDK Solar (LDK) - BofA/Merrill
• Beazer Homes (BZH) - Citi
• Hansen Natural (HANS)
• Brown-Forman (BF.B) - Goldman Sachs
• Textron (TXT) - Added to Conviction Buy at Goldman
• Intuit (INTU) - Jefferies
• Apple (AAPL) - Initiated Buy at Sterne, Agee
• Qualcom (QCOM) - Initiated Neutral at Sterne, Agee
• Williams-Sonoma (WSM) - Estimates increased at Wells Fargo

Downgrades:
• Phillips-Van Heusen (PVH) - Citi
• Psychiatric Solutions (PSYS) - Citi
• BB&T Corp (BBT) - Deutsche Bank
• US Bancorp (USB) - Deutsche Bank
• Bucyrus (BUCY) - Goldman Sachs
• DreamWorks Animation (DWA) - Thomas Weisel
Long positions in stocks mentioned: AAPL

David Moenning
Main: 630-250-4700
Direct: 303-670-9761

http://www.topstockportfolios.com/
________________________________________
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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