David Moenning's Daily State of the Markets: 8/25

August 25, 2009 9:36 AM EDT
Sense and Sensibility

In the middle of July, the stock market defied the bears and proceeded to march higher day after day. At that time, the glass-is-half-empty crowd had us convinced that the banks and the economy were in trouble again. But despite the daily warnings from traders about the overbought condition and the unsustainability of the move, the NASDAQ finished with green screens for eleven straight sessions. Then after a brief pause, during which the bears could be heard pounding the table that a correction must start now, the bulls got back on track. And at least on the Dow, stocks have now been higher for five straight days.

Yes, it is true that yesterday's session was more than a little disappointing for the bull camp. Stocks initially continued the rally from Friday based on Ben Bernanke's proclamation that the economic recovery was coming sooner rather than later. However, with no real news to trigger additional upside here in the U.S. (there was some better-than expected economic data in Europe) and the move looking a little parabolic on the charts, it appears that some sense and sensibility may have returned to the corner of Broad and Wall yesterday.

Don't get me wrong, I am NOT one of those folks who suggest that the market is headed for an imminent fall, that current stock prices are not justified by the earnings or economic fundamentals, or that stocks have to pull back because they've run up 50% off the bottom. No, we've been through a recession/recovery cycle before and we've seen at least a couple of history's crashes/panics in the market. To review briefly, it is our humble opinion that the move from March 10th through early May was simply a "take back" of the January-to-March 9th plunge and that the move up from there has been a "discounting" of the fact that the recession is ending.

As we mentioned in our weekend report, playing the valuation game right now based on earnings and P/E's is a very tricky business since the "P" is rising (thanks to mutual funds returning to a fully invested position) while, at the same time, the "E" is diving due to the recession. The point is that money is obviously flowing into the market and as long as it appears the economy will avoid a Roubini-style double-dip, it will likely continue to do so - regardless of the bear camp's long list of complaints.

Getting back to the idea of some sense and sensibility returning to the market yesterday, it is probably a good idea to remember that trees don't grow to the sky and unsustainable moves in either direction tend to end badly. So, while those coming late to the party may have been disappointed that the most recent edition of the rally stalled yesterday, in the long run, it is probably a good thing that the bears showed up and made a game of it.

Turning to this morning, we don't have any economic data to review before the bell. However, the big news, at least as far as we're concerned, is the Bloomberg report that Obama will announce the reappointment of Ben Bernanke to the Chairman's role of the Federal Reserve today - which fits in nicely with our theme of sense and sensibility.

Running through the rest of the pre-game indicators, the major overseas markets are down across the board. Crude futures are moving a bit lower with the latest quote showing oil trading off by $0.09 to $74.28. On the interest rate front, we've got the yield on the 10-yr trading at 3.496%, while the yield on the 3-month T-Bill is trading at 0.17%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a modestly higher open. The Dow futures are currently ahead by about 40 points; the S&P's are up about 5 points, while the NASDAQ looks to be about
7 points above fair value at the moment.

Today's Earnings Before the Bell:
Big Lots (NYSE: BIG) - Reported $0.35 vs. $0.30
Burger King Holdings (NYSE: BKC) - Reported $0.43 vs. $0.33
Medtronic (NYSE: MDT) - Reported $0.79 vs. $0.78
Staples (Nasdaq: SPLS) - Reported $0.16 vs. $0.163

Upgrades/Downgrades/Brokerage Research:
Apple (Nasdaq: AAPL) - Mentioned positively at BMO Capital
Companhia Vale do Rio Doce (Nasdaq: VALE) - Downgraded at HSBC
Southern Copper (NYSE: PCU) - Downgraded at HSBC
Warner Chilcott (Nasdaq: WCRX) - Upgraded at Jefferies
Lowes (NYSE: LOW) - Upgraded at Morgan Stanley
Sherman Williams (NYSE: SHW) - Downgraded at Morgan Stanley
Central European Distribution (Nasdaq: CEDC) - Downgraded at Morgan Stanley
Google (Nasdaq: GOOG) - Upgraded at ThinkEquity
Denbury Resources (NYSE: DNR) - Downgraded at UBS
Costco (Nasdaq: COST) - Upgraded at William Blair

Long positions in stocks mentioned: AAPL, WCRX, MS


Note: All earnings reports compared to Reuter's consensus estimates

** For More of David Moenning's Market Analysis, Stock Portfolios, and Trading Ideas, visit: TopStockPortfolios.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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