David Moenning's Daily State of the Markets: 03/15

The Bears Blinked First

Good morning. Tuesday’s drop of 240 points meant that it was suddenly “game on” with regard to which team would control of the ball next. The bulls had put on a pretty good showing during last week’s bounce higher, but the bears showed they meant business on Tuesday by erasing nearly the entire gain in a single afternoon.

Most analysts had been looking for a retest of the recent lows, but the ease with which the grizzly gang had ripped the indices lower Tuesday made the idea of additional selling a foregone conclusion. So, when traders woke up to a sea of red numbers in the foreign markets yesterday morning and more bad news on the subprime front, it looked like it might get ugly. And things did indeed turn ugly late in the morning when, for no apparent reason, the Dow found itself down -136 points and below an important support level at 12,000.

While the catalysts for the move down were not overt, it appeared that worries over the subprime mortgage mess spreading out into the financial sector were coming to fruition. While GM’s earnings were a breath of fresh air after three straight quarterly losses, the troubles at GMAC’s Residential Capital real-estate financing unit added some concern. In addition, word that H&R Block (HRB) would be forced to delay filing its annual report so that it could properly calculate the write-down in its mortgage business helped convince investors that the high risk mortgage problems may not be limited to the subprime lenders.

But a funny thing happened on the way to the market massacre yesterday – it just didn’t occur. With the market at an important juncture on the charts and fear in the air, the bulls went toe-to-toe with their opponents over lunch yesterday. And just about the time you thought that this corrective phase might stick around for a while, the bears appeared to blink first and stocks were suddenly on the mend.

The techies will likely call yesterday’s action a Key Reversal day. The idea is that whenever stocks are down hard after several days of selling and then reverse higher on big volume, it is an indication that the sellers have been washed out and it’s time to go the other way. However, given the fact that we’ve got an options expiration week on our hands, we might want to hold the champagne for a little while longer.

Turning to this morning, all eyes are on the inflation numbers so let’s get to the data. The Producer Price Index for February came in with gain of +1.3%, which was much hotter than the expected increase of +0.5%. When you strip out food and energy, the numbers were better at +0.4%, but still higher than analysts expectations at +0.2%. And although some will suggest that these numbers were an anomaly, those arguing for a Fed rate cut will find the sledding to be a bit tougher after this report.

Running through the pre-game indicators, gold futures are trading lower by $6.70 this morning to $641.00 right now. In the oil pits, crude futures are up $0.33 this morning and the latest quote is at $58.49. Interest rates are moving higher this morning in reaction to the PPI data, with the yield on the 10-year currently trading at 4.55%. And finally, with about an hour before the bell, stock futures in the U.S. have reversed course and are a little lower at the moment.

Stocks “In Play” This Morning:

Kohls (NYSE: KSS) – Upgraded at BofA
Intuit (INTU) – Upgraded at BofA
Dollar General (NYSE: DG) – Downgraded at BofA
Heinz (NYSE: HNZ) – Upgraded at Credit Suisse
Marathon Oil (NYSE: MRO) – Upgraded at Goldman Sachs
Frontier Oil (NYSE: FTO) – Upgraded at Goldman Sachs
ConocoPhillips (NYSE: COP) – Downgraded at Goldman Sachs
H&R Block (NYSE: HRB) – Upgraded at Morgan Stanley
Amerigroup (NYSE: AGP) – Upgraded at Stifel
Lehman Brothers (NYSE: LEH) – Upgraded at Wachovia
CBOT Holdings (BNYSE: OT) – ICE has proposed to buy BOT
Bear Stearns (NYSE: BSC) – Reported $3.82 vs. $3.80

Mr. Moenning holds Long positions in stocks mentioned: BSC, GS, KSS, MRO, FTO

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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