David Moenning's Daily State of the Markets: 08/22

Running Out of Reasons?

Good morning. As they say, all good things must come to an end at some point. And so it was for the market�s five-day winning streak yesterday. There was no major catalyst for the modest pullback and the selling was by no means intense. It simply appeared that the combination of a post expiration letdown, the fact that vacation season is in full swing, a defiant stance from Iraq and the resulting higher oil prices, and a crummy outlook from Lowe�s was all simply too much for the bulls to overcome.

The bears can take one look at the week�s opening session and argue that the bulls are clearly running out of reasons to buy. Our furry friends are quick to point out that it doesn�t take much imagination to extrapolate yesterday�s comments from Lowe�s to the economy in general. In a statement accompanying their disappointing full-year forecast, the company said that higher oil prices and a sluggish housing market are affecting the consumer�s willingness to spend. And since the consumer accounts for two-thirds of the economy�s production, well, you get the picture.

So, with an economy that is clearly slowing and earnings that may have peaked, there may not be a lot of good reasons to extend the current rally. In fact, it would be relatively easy to argue that traders may want to take a wait-and-see approach to the market for a while. Why not see if Mr. Bernanke can indeed produce a soft landing for the economy before making any new commitments?

While this is certainly a logical projection, we have to remember that the stock market is a discounting mechanism and the fact that the economy is slowing is already a known factor. Thus, the bulls argue that this is already priced into the market and that we need to look ahead instead of back. And given that the Fed has a history of initiating a rate reduction campaign soon after ending a rate hike campaign, the bulls argue that stocks should begin discounting the prospects for lower rates soon.

Thus, for those investors that are not currently on vacation, there are some questions that need to be answered. For example, have the bulls have run out of reasons to buy? Or was yesterday�s action simply a pause that refreshes?

Turning to this morning, stocks appear to continue to be in vacation mode so far. On the news front, Iran is expected to formally respond to the U.N. today, however it appears abundantly clear that the country will continue to enrich uranium. European markets are pulling back this morning after the German ZEW report showed a �clear cooling of the economy in six months.�

Looking ahead to the rest of the day, the only economic data comes from the Richmond Fed Index, which will be released at 10:00 am. However, we will hear from both Atlanta Fed President Jack Guynn and Chicago Fed President Michael Moskow this afternoon.

Running through the rest of the pre-game indicators, the overseas markets are mixed by region with Asian markets higher and European markets lower. Gold futures are moving a little lower this morning and are currently exchanging hands at $632.80. Crude futures are doing little at the moment and are trading up by $0.02 to $72.42 so far. Interest rates are also little changed this morning with the 2-year currently quoted at 4.87% while the 10-yr is trading with a yield of 4.81% right now. And finally, with about an hour before the bell, stock futures in the U.S. are moving a little lower. The Dow futures are currently off by 21, the S&Ps are down 2.30, and the NASDAQ is sporting a decline of more than 4 points at the moment.

Stocks �In Play� This Morning:

E-Trade (ET) � Rated overweight at Lehman
Toll Brothers (TOL) � Reported $1.16 vs. $1.04
Goodyear Tire (GT) � Upgraded at JP Morgan
Heinz (HNZ) � Moody�s downgrades senior debt
Sun Healthcare (SUNH) � Downgraded at UBS
Dollar General (DG) � Upgraded at Deutsche Bank
DeVry (DV) � Upgraded at Merrill Lynch
Longs Drug (LDG) � Downgraded at JP Morgan
Omicare (OCR) � Downgraded at Stifel Nicolaus
XM Satellite Radio (XMSR) � Upgraded at Bear Stearns
Advanced Micro Devices (AMD) � Upgraded at Bear Stearns
Coach (COH) � Added to Buy list at Goldman Sachs
Aeropolstale (ARO) � Removed from Buy list at Goldman Sachs
Sprint Nextel (S) � Downgraded at Merrill Lynch

Long positions in stocks mentioned: MER, GS, ET, BSC

** 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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