David Moenning's Daily State of the Markets: 2/6

Suddenly Everybody's a Technician

Here's a link to listen to an Audio Version of the report:

If you heard the word "retest" once yesterday, you may have heard it 100 times as suddenly everybody is a chartist and all they can talk about is a retest of the stock market lows seen last month. In case you don’t spend your days poring over charts or reviewing Martin Pring’s "Technical Analysis Explained," which, by the way, means that you may be in the minority of stock market investors these days, whenever a market experiences a serious correction, the charts tend to follow a similar pattern around the lows.

First, a batch of highly emotional selling occurs after some big bad event, which tends to cause anybody still thinking about selling to panic out all at once. This creates a "washout," which is a signal to traders that the downward movement may be ending in the near term and the intelligent shorts, run for cover. Now toss in some bargain hunting and boom – you’ve got a bounce higher on your hands.

The bounce is usually short and sharp, makes everyone feel better, and lasts somewhere between several days and a couple of weeks on average. However, in order to be convinced that it is safe to get back into the water, the really big money usually waits for a “retest of the lows,” which tends to occur in response to something bad happening and usually takes place within a few days to a couple of months from the time the lows were put in.

Yesterday's Non-Manufacturing ISM report, which is designed to indicate the health of the services sector in the U.S. economy, was the "something bad" that caused everybody with a computer to start talking about a retest of the lows yesterday.

Make no mistake about it, the ISM report was bad. The non-manufacturing index fell to a reading of 41.9% in January, which was a problem on several fronts. First, it was the first reading below 50, which is the line in the sand for expansion/contraction in the services side of the economy. And as such, the talk of recession suddenly gained significant credence. Next, the reading was significantly below analysts’ expectation, meaning that the weakness was a surprise. And finally, it was the largest one-month drop in the history of the index.

In short, the ISM gave the bears a catalyst and from there the bad news just kept coming. We heard about tighter credit standards, which will lead to more stress on the consumer. We heard that more writedowns are coming from across the pond. We heard that the rescue plan for bond insurers is hardly a sure thing. And we heard that Fitch placed MBIA’s AAA rating on watch, which is usually a precursor to a downgrade – which is exactly what the bears have been harping about lately.

So, with all charts pointing to a retest and a bevy of bad news in hand, the rout was on. As a result, the buyers simply decided to avoid stepping in front of the train and appeared to go home early.

Turning to this morning, we've got some new economic data to review in the form of the fourth quarter’s Nonfarm Productivity and Unit Labor Costs. The report shows that workers continue to be more productive as the number came in at 1.8 versus expectations for 0.5. And on the inflation front, Labor Costs were actually lower than expected at 2.1 versus 3.1. Thus, the Fed’s easing policy appears to be justified.

Turning to the stock market, despite the markets plunging in Asia, there seems to be an improvement in the mood this morning as the futures have been higher most of the morning.

Running through the rest of the pre-game indicators; overseas markets are lower across the board this morning. Crude futures are higher with the latest quote up $0.29 to $88.70. Interest rates are moving higher with the 10-yr trading at a yield of 3.59% at the moment. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to a modest improvement after yesterday’s big dive. The Dow futures are currently up about 80 points; the S&Ps are up by about 11 points, while the NASDAQ looks to be about 9 points ahead of fair value at the moment.

Stocks "In Play" This Morning:

Yesterday's Earnings After the Bell:

ACE Limited (ACE) – Reported $2.05 vs. $1.90
Advent Software (ADVS) – Reported $0.14 vs. $0.12
CB Richard Ellis (CBG) – Reported $0.63 vs. $0.71
Walt Disney (DIS) – Reported $0.63 vs. $0.52
Harman Intl (HAR) – Reported $0.73 vs. $0.70
InfoSpace (INSP) – Reported $0.16 vs. -$0.01
JDS Uniphase (JDSU) – Reported $0.22 vs. $0.12
Nabors (NBR) – Reported $0.78 vs. $0.73

Today’s Earnings Before the Bell:

Biogen Idec (BIIB) – Reported $0.89 vs. $0.81
CIGNA (CI) – Reported $0.98 vs. $0.97
Devon Energy (DVN) – Reported $2.16 vs. $1.90
Thermo Fisher Scientific (TMO) – Reported $0.76 vs. $0.69
Time Warner (TWX) – Reported $0.28 vs. $0.29

News, Upgrades/Downgrades/Brokerage Research:

Sprint (S) – Target reduced at Bank of America
General Motors (GM) – Downgraded at Bear Stearns
Ford (F) – Downgraded at Bear Stearns
Boston Scientific (BSX) – Upgraded at Citi
Harman Intl (HAR) – Downgraded at Credit Suisse
Advent Software (ADVS) – Upgraded at Deutsche Bank
Thornburg Mortgage (TMA) – Upgraded at Jefferies
Estee Lauder (EL) – Upgraded at Lehman
Clorox (CLX) – Downgraded at Lehman
Iron Mountain (IRM) – Upgraded at Morgan Stanley
American Tower (AMT) – Upgraded at UBS
Crown Castle (CCI) – Upgraded at UBS

Mr. Moenning holds Long positions in stocks mentioned: ADVS

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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