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

Mojo No Go

For a while yesterday, it looked like the bulls had regained their mojo and were ready to mount a serious counter offensive against their opponents. Stocks climbed in the early going on the back of strong gains in Europe and a reflex rally in commodities. But late in the day, the bears returned and the rally attempt appeared to be a no go.

While it isn�t exactly easy to get your arms around, the rally in commodities, which arguably could be considered inflationary, actually gave the bulls a hand yesterday. The thinking is that rising commodity prices are an indication of ongoing growth in the global economies. And a growing economy can better handle the higher interest rates that are cropping up worldwide. So, for now anyway, rising prices in things such as steel, copper, etc. just might be a good thing.

But there is another aspect of this story that is important to understand. Given the all-out plunge that the metals market has experienced lately, it was easy think that demand in places like China and India might be slowing. However, in reality, much of the move down was tied to margin selling and worry that additional declines would bring even more forced selling by overextended hedge funds.

Let�s remember that the commodities market entails the use of big leverage. The problem with this game is if prices go south unexpectedly, margin calls are made asking investors to put up more capital. However, if the investor doesn�t meet the call for more cash (and one of the rules of survival in this game is to never meet a margin call), the position is sold down. But unfortunately, margin clerks don�t give a hoot about the way the order is handled � thus they wind up indiscriminately blowing in with big sell orders. Savvy traders see this happening and are thus unlikely to step in to do any buying.

Yesterday it appeared that the margin selling had ended and that the rumored demise of some big funds were unfounded. This allowed the buyers to reenter the game without worry of being hammered by the margin clerks and commodities enjoyed a rebound.

Getting back to stocks, the move in commodities gave traders reassurance that there wasn�t going to be any hedge fund �blow ups� which could have put further pressure on an already skittish stock market. However, what the bulls didn�t count on was word of human-to-human contraction of bird flu in North Sumatra. And while the World Heath Organization stated that there "no evidence that efficient human-to-human transmission has occurred" (the case in question occurred within one family unite), this type of news was all the bears needed in the last hour of trading.

So with oil trading up $1.80, a weaker than expected Richmond Fed Index, concerns over options dating becoming the next big scandal, and fears over the possibility of a bird flu pandemic, the bulls lost their mojo and stocks gave up their gains. The bears argue that the rally failure gives them clear sailing for lower prices while the bulls will try and suggest that the decline was an overreaction.

Turning to this morning, concerns over the possible spread of bird flu are lingering and the issue is pressuring stocks in Europe as well as here in the U.S.

We�ve also got some economic data to pour over. The report on sales of Durable Goods came in much weaker than expected. The headline number showed a drop of -4.8%, which was obviously well below expectations for a decline of -0.5%. And while everyone knows this is a volatile data series due to the effect of aircraft orders from month to month, there is no escaping the fact that this report came in weaker across the board. The bulls are quick to point out that this argues favorably for a pause by the Fed at the June meeting and stock futures have ticked higher in response to the data.

Running through the pre-game indicators, Japan enjoyed a strong session overnight while the rest of the major foreign markets were all lower. Oil futures are losing $0.95 right now to $70.81. Gold is moving lower this morning and is currently quoted at $657.50 right now. Interest rates are moving lower this morning with the 2-year currently trading at 4.90% while the 10-yr has moved below the 5% level and is quoted at 4.99% right now. And finally, with about an hour before the bell, stock futures in the U.S. are trying to recover some of the bird flu induced losses overnight but are still below fair value at the present time. The Dow futures are currently higher by 40 points, the S&Ps are higher by 3.80, and the NASDAQ is sporting a gain of about 4 points.

Stocks �In Play� This Morning:

Anglo American (AAUK) � Upgraded at ABN Amro
Cymer (CYMI) � Mentioned positively in IBD
Sunoco (SUN) � Morgan Stanley raises oil forecast, lists favorite stocks
General Motors (GM) � Upgraded at Merrill Lynch
Jabil Circuit (JBL) � Upgraded at BofA
Dell (DELL) � Plans to open pilot retail stores
Microsoft (MSFT) � Announces deal with CDC Corp for enterprise software in China
Medtronic (MDT) � Reported $0.62 vs. $0.62, Revenues $3.08B vs. $3.07B, Guides higher
SBA Communications (SBAC) � Secondary offering priced at $21.13
Vonage (VG) � IPO priced at $17
Wynn Resorts (WYNN) � Mentioned positively at Bear Stearns

Positions in stocks mentioned: BSC, CYMI, SUN, MS, SBAC

** 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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