David Moenning's Daily State of the Markets: 05/01

Sell In May And Go Away?

Good morning. In our weekend State of the Markets report, we highlighted not one, not two, but FIVE big-picture buy signals that have occurred in recent weeks. The report probably left most readers humming “We’re In the Money” and expecting nothing but green screens ahead. And then, almost right on queue, yesterday’s consumer spending data came in on the punk side and stocks sank -58 points.

With nice gains on the books for the month – April was the best month for the Dow since December 2003 – the bulls actually had little incentive to do any dressing of windows on the last day of the month. This, of course, left the door wide open for the bears to do a little selling into the close. And in reality, yesterday’s drop was much worse than it looked. The S&P 500 fell the equivalent of 102 Dow points, the NASDAQ dropped -1.3%, and the Russell 2000 declined by -1.8%, or the equivalent of 238 points of the venerable DJIA.

So, does this mean that yesterday’s sudden downturn and the weak data trumps the big-time buys we’ve seen? Should we just forget about Dow Theory and Breadth Thrusts and 9-to-1 Up Days? And while we’re at it, should we implement the age-old timer’s motto of “Sell in May and go away?”

Well, as they are fond of saying at Hertz, not exactly. Yes, stocks are overbought. Yes, most of the leaders have charts that are parabolic in nature. Yes, the market could (and should) pull back at some point soon for just about any old reason. But none of this negates the big-time buy signals that were given.

You see, these are long-term signals that are based on momentum. And as technicians are fond of saying, a stock in motion tends to stay in motion. But, as we pointed out this weekend, most of these indicators have pretty crummy records in the short-term.

The idea here is that when we see these types of longer-term momentum signals, we should be looking for upward movement in stocks over the next three to six months. But, heaven only knows what will happen over the next 3 to 6 days. Thus, armed with the knowledge that the bulls have momentum on their side, traders can look to buy the dips for a while.

So, was yesterday’s action the beginning of a dip? Frankly, I’m not smart enough to tell you that. But I am here to say that we need to continue to give the bulls the benefit of the doubt for a while yet.

Turning to this morning, there is no economic news before the bell and the majority of the foreign markets were closed. But with seasonality favoring the bulls for the next few days, it will be interesting to see whether or not yesterday’s downside action was a one-day wonder.

Running through the rest of the pre-game indicators, as we mentioned, most of the major foreign markets were closed overnight. Gold futures are moving down this morning by $5.20 and are trading at $678.30. In the oil pits, crude futures are lower by $0.04 with the latest quote at $65.67. Interest rates are a moving down again this morning with the yield on the 10-year currently trading at 4.62%. And finally, with about an hour before the bell, stock futures in the U.S. are pointing slightly northward. The Dow futures are currently ahead by 22 points; the S&P’s are about 2 points above fair value, while the NASDAQ also looks to be about 3.50 ahead of fair value at the moment

Stocks "In Play" This Morning:

Yesterday’s Earnings After the Bell:

Centex (NYSE: CTX) – Reported <$0.18> vs. <$0.03>
EOG Resources (NYSE: EOG) – Reported $0.99 vs. $1.03
Medimmune (NASDAQ: MEDI) – Reported $0.66 vs. $0.56
Principal Financial Group (NYSE: PFG) – Reported $0.87 vs. $0.93
Vulcan Materials (NYSE: VMC) – Reported $0.91 vs. $0.80

Today’s Earnings Before the Bell:

Archer Daniels Midland (NYSE: ADM) – Reported $0.56 vs. $0.61
Automatic Data Processing (NYSE: ADP) – Reported $0.65 vs. $0.72
Avon Products (NYSE: AVP) – Reported $0.34 vs. $0.28
Liz Claiborne (NYSE: LIZ) – Reported $0.22 vs. $0.60
Medco Health (NYSE: MHS) – Reported $1.03 vs. $0.73
Procter & Gamble (NYSE: PG) – Reported $0.74 vs. $0.74
Qwest (NYSE: Q) – Reported $0.12 vs. $0.09
Sirius Satellite Radio (NASDAQ: SIRI) – Reported <$0.10> vs. <$0.11>

News, Upgrades/Downgrades/Brokerage Research:

American Home Mortgage (NYSE: AHM) – Downgraded at AG Edwards
Diageo (NYSE: DEO) – Price target increased at BofA
LSI Corp (NYSE: LSI) – Downgraded at BofA
Ingersoll Rand (NYSE: IR) – Upgraded at Bear Stearns
Circuit City (NYSE: CC) – Downgraded at CIBC, Citigroup, Credit Suisse, Raymond James
Research in Motion (NASDAQ: RIMM) – Upgraded at Credit Suisse
Danaher (NYSE: DHR) – Upgraded at Goldman Sachs
EOG Resources (NYSE: EOG) – Upgraded at JP Morgan
Verizon (NYSE: VZ) – Upgraded at Prudential
Sprint Nextel (NYSE: S) – Downgraded at Prudential

Mr. Moenning holds Long positions in stocks mentioned: GS, AAPL, VLO, CG

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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