David Moenning's Daily State of the Markets: 05/24

Greenspan Spoils the Fun

Good morning. For the third day in a row, the S&P 500 teased investors by moving up into all-time high territory and then failing to close there. This time, it looked like the move above 1527.35 was a lay-up as the market stepped lively in the morning in response to the potential bidding war for Alcan (AL). By lunchtime, the Dow was up almost 60 points and the S&P was solidly into record high territory.

But then Mr. Irrational Exuberance himself spoiled the fun. Former Fed Chairman Alan Greenspan, who has a history of trying to cool things down in the stock market, suggested that the Chinese stock market could be in for a “dramatic contraction” at some point. And while this is hardly breaking news with the Shanghai Composite up more than 250% since mid 2005, traders decided to take some profits anyway.

Within minutes, the green numbers were gone and it looked like things might get ugly. As you may recall, worries over China’s financial markets were at the center of that nasty pullback we saw at the end of February. And knowing that Mr. Greenspan always chooses his words carefully, the term “dramatic contraction” brought back memories of the collapse of the Japanese stock market, which began in 1989.

With both teams readily admitting that things have been more than a little one-sided lately and some big economic news on the horizon, it wasn’t terribly surprising to see some selling yesterday as there didn’t appear to be much reason to buy stocks yesterday afternoon.

It also didn’t help that oil prices failed to pull back after the inventory numbers came in higher than expected or that bond yields surged for the fourth time in the last five sessions.

We’ve been suggesting for a while now that the move up in bond yields is something to pay attention to. But so far at least, the move from 4.6% to 4.86% over the past two weeks hasn’t attracted much attention at all. However, it now appears that the boys in the bond pits have a bead on the 4.90% level, which is the high yield for the year. If that were to be taken out, it is a pretty safe bet that stock traders might sit up and take notice.

Turning to this morning, we finally have some economic news to review before the bell. The report on Durable Goods came in a bit lighter than expected. Order for durable goods rose by +0.6% in April, which was below the consensus estimate for an increase of +1%. When you strip out transportation, we see a slightly different picture with gains of +1.5% whereas expectations were for an increase of +0.6%. In addition, March’s numbers were revised higher.

The markets haven’t shown much movement in reaction, partly because this is old data and reinforces what traders already know – that Goldilocks is alive and well.

Running through the rest of the pre-game indicators, the major foreign markets are lower this morning. Gold futures are moving down by $2.30 to $660.30. In the oil pits, crude futures are lower by $0.36 with the latest quote at $65.41. Interest rates are doing little this morning with the yield on the 10-year currently trading unchanged at 4.86%. And finally, with about an hour before the bell, stock futures in the U.S. are looking to open on the mixed side. The Dow futures are currently ahead by about 8 points; the S&P’s are right at breakeven, while the NASDAQ looks to be 3 points better than fair value at the moment.

Stocks “In Play” This Morning:

Yesterday’s Earnings After the Bell:

Abercrombie & Fitch (NYSE: ANF) – Reported $0.65 vs. $0.65
Limited Brands (NYSE: LTD) – Reported $0.13 vs. $0.13
Network Appliance (NTAP) – Reported $0.23 vs. $0.21

Today’s Earnings Before the Bell:

Mylan Labs (NYSE: MYL) – Reported $0.47 vs. $0.55
Toll Brothers (NYSE: TOL) – Reported $0.66 vs. $0.14

News, Upgrades/Downgrades/Brokerage Research:*

Boeing (NYSE: BA) – Price Target increased at Bank of America
Heinz (NYSE: HNZ) – Upgraded at Citigroup
Worthington Steel (NYSE: WOR) – Downgraded at Goldman Sachs
New York Times (NYSE: NYT) – Upgraded at JP Morgan
Research in Motion (Nasdaq: RIMM) – Price Target increased at Merrill Lynch
Manpower (NYSE: MAN) – Upgraded at Morgan Stanley
Valueclick (Nasdaq: VCLK) – Downgraded at Piper Jaffray
Lyondell Chemical (NYSE: LYO) – Downgraded at UBS

Mr. Moenning holds Long positions in stocks mentioned: GS, MER

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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