David Moenning's Daily State of the Markets: 07/11

Retail Wreaks Havoc

Good morning. Almost right on queue, the major indices appeared to bump their heads on the overhead resistance presented by the old highs and retreated in a hasty fashion yesterday. In all fairness, with stocks finishing Monday just a stone\'s throw from the Promised Land of all-time highs, it wasn\'t exactly surprising to see the bears put up a bit of a fight.

Technicians will tell you that last week\'s rally on light volume was the culprit here, as there was no real support for the move higher and yesterday\'s drop of -148 is what happens to moves that occur on light volume. But in reality, stocks sank yesterday on the back of troubling forecasts from Home Depot (NYSE: HD), Sears (NASDAQ: SHLD), and D.R. Horton (NYSE: DHI) as well as another rise in crude prices.

With just a handful of companies having reported so far, it looks like stocks are following the now-familiar pattern of sinking at the start of earnings season. Over the past few quarters, the market has turned lower on rocky starts from the likes of Alcoa (NYSE: AA), only to recover as the bulk of the reports then came in better than expected.

But make no mistake about it, it was the dreary outlooks from the likes of Lexmark (NYSE: LXK), HD, SHLD, and DHI that were responsible for yesterday\'s drubbing. In short, the preannouncements suggest that the sluggish housing market might actually dampen consumer spending after all. This has been a worry for some time now and investors have become quite sensitive to anything that negatively impacts consumers. And with oil prices moving up through $73 intraday yesterday (August futures closed up $0.62 to $72.81), it isn\'t much of a stretch to start taking concerns about the consumer seriously.

While bad news on the housing front and some caution from retailers isn\'t exactly a surprise at this stage of the game, the severity and duration of the housing downturn continues to weigh heavily on investors\' psyche. Then to top things off, S&P announced yesterday that it was considering lowering the credit rating on $12 Billion of debt backed by subprime mortgages because of, yep, you guessed it - higher-than expected losses. This, like the housing data, was sobering news as the market remains skittish to the potential for the subprime problems to cause a ripple affect throughout the financial markets.

Turning to this morning, we don\'t have any economic data to speak of today, but we will get a couple of earnings reports after the close - Genentech (NYSE: DNA) and YUM Brands (NYSE: YUM). And then from there, the earnings really start to roll next week.

Running through the rest of the pre-game indicators, the foreign markets all followed Wall Street lower. Gold futures are moving down a smidge this morning by $0.10 to $664.30. In the oil pits, crude futures are moving down a bit with the latest quote off $0.26 at $72.55. Interest rates are moving up this morning with the yield on the 10-year currently trading at 5.05%. And finally, with about an hour before the bell, stock futures in the U.S. are looking flat at the moment. The Dow futures are currently up by about 2 points; the S&P\'s are higher about 2 points, while the NASDAQ looks to be unchanged relative to fair value at the moment.

Stocks "In Play" This Morning:

News, Upgrades/Downgrades/Brokerage Research:*

Lowe\'s (NYSE: LOW) - Estimates lowered at Banc of America
Exxon Mobil (NYSE: XOM) - Target increased at Bear Stearns
Total (NYSE: TOT) - Target increased at Bear Stearns
Chicago Mercantile Holdings (NYSE: CME) - Downgraded at Deutsche Bank
CB Richard Ellis (NYSE: CBG) - JMP Securities initiates coverage with strong buy rating
Campbell Soup (NYSE: CPB) - Upgraded at JP Morgan
NYSE Euronext (NYSE: NYX) - Upgraded at Lehman Brothers
Noble Corp (NYSE: NE) - Downgraded at Merrill Lynch
Diamond Offshore (NYSE: DO) - Downgraded at Merrill Lynch
Smith Intl (NYSE: SII) - Downgraded at Merrill Lynch
Baker Hughes (NYSE: BHI) - Downgraded at Merrill Lynch
Conseco (NYSE: CNO) - Downgraded at Morgan Stanley
General Dynamics (NYSE: GD) - Target increased at UBS
YUM Brands (NYSE: YUM) - Target increased at UBS
Forest Labs (NYSE: FRX) - Upgraded at UBS
Taiwan Semiconductor (NYSE: TSM) - Downgraded at UBS

Mr. Moenning holds Long positions in stocks mentioned: 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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