David Moenning Daily State of the Markets: 02/13

Cracks in the Foundation?

Early Friday morning, stocks picked up where they left off on Thursday and headed straight back down to their recent lows. Worries over earnings and the yield curve were blamed for the early dive. Pfizer had issued a profit warning and the return of the 30-yr bond focused attention on the fact that the yield on the 2-yr was exceeding both that of the 10-yr and 30-yr bonds.

In the second hour of trading, things started to get ugly and it looked like there were some cracks becoming visible in the foundation of the bull case. Semis were diving, the oils were in the tank again, and tech darlings Apple and Google were both breaking to new lows. In short, it looked like the bulls were about to be overrun.

But then it happened. Somebody, somewhere, uttered the magic words. Over the years, I�ve noticed that when stocks are in decline, at some point during the downtrend, the bears tend to overdo it. Sure enough, about the time I heard a colleague use the phrase �this is getting ridiculous,� in reference to the selling in the oil patch, the buy programs began.

Within minutes the mood appeared to turn and almost everything started to move up in unison. The semis bounced up off the 18 day, oil services reversed after touching the 50 day, banks headed higher in spite of the yield curve, metals moved up off the bottom after a week of hard selling, and even the dynamic duo of Google and Apple were bouncing. So what was the common theme to drive this diverse set of industries up together? In short, there wasn�t one. Thus, the move smacked of computer driven buying and is therefore a bit suspect.

The bulls will claim that stocks held up under pressure and since the indices actually finished higher on the day, the session has to be considered positive. But in light of the fact that volume did not advance and breadth was downright unimpressive on the proclaimed reversal, we�ll hold off on joining the party for now.

Looking to the week ahead, traders will have to suffer through one more day without any economic news to guide them. But after that, the calendar becomes fairly full. On Tuesday we will get reports on both Retail Sales, which provides insight into the state of the consumer, and Business Inventories. Wednesday brings reports on the health of the manufacturing sector as we get data from the Empire region as well as the report on Industrial Production. For obvious reasons, Thursday�s highlight will be the Philly Fed Index. And then on Friday we get the PPI report and more data on consumer sentiment from the University of Michigan.

Turning to this morning, stocks are heading lower in the early going. The Barron�s cover story suggesting that Google may be in trouble has stocks on the defensive. The article suggests that GOOG faces competition from MSFT and YHOO, increased pressure in online ad sales, and mounting concern about click fraud. Shares of the internet search company are trading lower by -$14.12 to $348.49 in the pre-market. And since Google has been a poster child for the new age of technology and a clear-cut leader in the current leg of the bull move, the bears are having little difficulty extrapolating this to the overall market at the moment.

Running through the rest of the pre-game indicators, Overseas markets were lower in Asia but up in Europe. Gold is down again this morning with a loss of $2.10 to $551.40. Oil is bouncing around breakeven and is currently trading up a penny to $61.85. Natural Gas is higher by $0.03 to $7.35. The yield curve remains a problem and yields are on the rise � the 2 yr is currently at 4.68% and 10 yr at 4.59%. And finally, stock futures in the U.S. are moving lower before the bell (Dow -18, S&P -2.10, and NASDAQ -3.50) but have improved from earlier levels.

Stocks "In Play" This Morning:
DELL � Citigroup sees potential upside
HPQ � Citigroup says to take profits on strength
PFE � Downgraded at Bernstein
MWD � Best rated stock picker for 2006 according to Zacks
AAPL � Being sued by consumer group alleging iPod Nano is defective
LMT � Lehman expects defense outlay for hardware to grow by 10%

Disclosure: At the time of publication Mr. Moenning and/or related companies are long the following positions: none

The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management (HCM) 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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